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GAM Talks Q2 19: What are the main risks?

17 April 2019

We asked a group of our portfolio managers a series of questions about their respective asset classes. This second video, in a series of three, considers what the main risks are currently.

Q2: What are the main risks for your asset class?

Mark Hawtin on Technology

Growth technology often draws investors into a feeling of risk, given the perception that where there’s more growth there’s more risk. In many asset classes that's the case, but we feel that's not the situation as far as technology generally is concerned. There are probably two areas of risk that investors should look at. The first is regulation – mega cap tech now provides us with four or five of the largest companies in the world (Amazon, Google, Facebook, etc) and some of these companies are likely to be key targets for regulation going forward. For example, we think it's possible we'll see some regulation for companies where individuals’ personal data is most clearly seen to be at risk, companies such as Facebook and Google perhaps, but less so for Amazon and Microsoft. This is clearly a risk that we need to take into account. The other risk everybody is talking about at the moment is in relation to concerns that the ten-year bull may be ending and that market economies seem to be slowing down and there are various macroeconomic frictions. The key point to emphasize is that as far as technology is concerned we believe the growth opportunity is so strong it can potentially grow through these macro risks; now we’re not saying share prices won't decline if markets decline but this, in our view, would just provide a yet better opportunity to buy shares at attractive prices.

Paul McNamara on Emerging Markets Fixed Income

Emerging markets are very much a growth-centric asset class, so the risks to this asset class are essentially the risks to growth. In the US, this is more likely to come from the Federal Reserve and its plans to hike interest rate than anything else. Europe, on the other hand, has seemed a little bit accident-prone over the last few years amid concerns about Italy, the outcome of Brexit, etc, so maybe it's harder to be optimistic about Europe than it is about the rest of the world. Generally speaking, however, we're not seeing excessive indebtedness and we're not seeing high inflation anywhere, so as long as this remains the case we think the risks to the asset class are fairly well contained.

Christian Gerlach on Commodities

In our view, the most risky environment for commodity derivatives is a deflationary shock – for example in 2008 when negative carry dominated, meaning there were contangos (when supply outweighs demand, leading to falling asset prices) in the asset class which then negatively impacted returns. This meant for 2008, the asset class was the major underperformer over the period versust other risky assets. This means a deflationary shock would be one of the worst environments for commodities. At the same time as a potential deflationary shock, however, there is one – gold –which can act as a hedge against cyclical or growth dependent instruments. This means even in times of crisis there is an instrument which can be well-positioned to work in a multi asset context.

Christophe Eggmann on Healthcare

When investors think about risks in healthcare they usually think about two kinds of risks – clinical and political. Clinical risk refers to binary, pipeline events and these are normally short-term in nature and have the potential to be diversified away in a broad portfolio. Political risk, in our view, is basically short-term noise because, at the end of the day, it's not legislation or ideology but technology that will help transform and reform the system. Therefore the key risk, to us, is that the development in technology and innovation may take longer to materialise and investors may become disappointed or frustrated and even lose confidence in the prospects for these developments.

Niall Gallagher on European Equities

We think the current risks are reasonably obvious – the prospect of a ‘no deal’ Brexit or the resumption of a dispute between the Italian government with the European Commission, although that risk appears to be reducing, or that there is a breakdown in the global trading order. These risks are fairly generic and well understood, but obviously they are still major concerns in their own right.

Anthony Lawler on Systematic Investing

One of the main risks to systematic investing is choppy, sideways market environments - this is a risk that is also applicable to discretionary managers, as well as long only or alternative managers. Systematic strategies are not immune from that risk if markets are choppy and sideways for a lengthy period of time and it can be a difficult environment for us to hit our expected returns.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Reference to a security is not a recommendation to buy or sell that security. Past performance is no indicator for the current or future development.
The companies referenced were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.
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