The Prevailing Winds of Politics

From pipelines to US/China trade to Brexit—macro themes are making market waves. Ian Riach shares insights on steering a steady course.

07.23.2019 - Ian Riach, Chief Investment Officer

From national issues such as pipelines, to the rising US/China trade dispute, to Brexit and Middle East tensions, politics is a prevailing theme for markets and investors alike. How do such macro concerns figure in managing your portfolio? We asked Ian Riach, Chief Investment Officer, Fiduciary Trust Canada, for his insights on steering a course amid geopolitical waves.

Q: Generally speaking, how are political issues affecting markets these days?

Investor sentiment is definitely being affected. We see markets swing on every headline or tweet, whether it is about trade, yellow vest protests or heightened military tensions.

I think the effect is currently more acute, partly because issues seem more broadly sweeping, and partly because we are late in the market cycle. Investors seem to be looking more closely for the cause of the next downturn, driven by the feeling that “we are due” for one.

Q: How do you manage risk/reward amid such macro themes?

First, we acknowledge that trade or other commerce-related disputes are unique and can be multifaceted. One rule does not apply to all. The duration and magnitude of any dispute is key to its effects on the economy and specific companies. For instance, in many cases a commerce- related dispute is resolved in fairly short order as both countries feel the impact of the problem. Alternatively, they can be long in duration as witnessed with the Canada/US softwood lumber dispute. It first reared its ugly head in the early ‘80s and was finally resolved just a few years ago.

In terms of multifaceted issues, a close-to-home example is the approval process for pipeline expansions in the United States. Ongoing uncertainty, which has negatively affected energy sector businesses, has been a boon to Canada’s railway companies, who have increased oil shipments to the United States.

We rely heavily on our underlying asset class managers to determine the effects of any dispute on underlying fundamentals of the companies whose securities we own. As importantly, we take a broadly conservative approach to money management, and when uncertainty rises, we tend to become more defensive until there is more clarity on an issue. Where prudent, we also try to use volatility to our advantage.

Q: Looking, for instance, at US/China trade tensions, what are your thoughts on managing investments as the situation unfolds?

This situation is particularly troubling, both from economic and political standpoints. Markets had initially anticipated a short-term fix and were fairly complacent. More recently, it seems investors are bracing for a more protracted dispute and that has caused more market volatility.

It is also troubling from a political standpoint, as both countries seem to be using tariffs as a weapon in the battle over global security and intelligence. Unfortunately, it appears Canada has been caught up in this dispute with claims that recent bans on canola seed and meat exports to China are related to this country’s detention of Huawei Technologies Co. Ltd. CFO, Meng Wanzhou.

Q: What should investors be mindful of?

It is important to realize volatility surrounding the uncertainty of geopolitical issues is usually short-lived. Even if temporary tariffs become embedded in a longer-term trade policy, companies adapt once they know the rules and growth typically resumes.

However, if you are feeling anxious in the current environment, we recommend speaking with your portfolio manager or advisor. Revisit your risk tolerance and determine if any structural changes should be made to your portfolio.






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