You can see the headlines at the moment – FTSE hits an all-time high, DOW hits all-time highs, and the DAX joins in as well. Add to that the VIX index (a market indicator of volatility), is at lows. You wouldn’t be the first to think that global economies are growing strongly and corporate profitability is rising fast… there is nothing to worry about. However, there are always two sides to every story, and I have my worries (especially being a glass-half-empty kind of person).
Will Trump succeed in pushing through his pro-growth policies (or actually, will he amend them to get them through)? Will Brexit be a disaster? Will North Korea start a war? How successful will monetary authorities be in unwinding quantitative easing, now that the patient is off life support? In fact has the patient become too reliant/addicted to the medicine provided? The markets seem to be disregarding any bad news If this bad news comes to fruition, how significant will the markets’ reaction be and what will this mean for my clients, trustees of UK defined benefit pension schemes, and their investment strategies? It means that they need to be wary when setting their investment strategy. They should be aware of the risks that they are running, for example, look at the scenario of equities falling more than 10% and the impact of this on their funding position. They should also think about how these events are going to impact on the corporate sponsor – as the Regulator and the industry keep saying; Integrated Risk Management is important. They should then set and maintain a strategy that looks to control those risks in a suitable fashion, whether that’s hedging interest rate and inflation risk, or diversifying their growth assets to protect against equity market falls. The key is to understand and quantify those risks and take action to mitigate them where relevant. This is not just about setting strategy, it is also about putting in a place a plan / structure to take advantage of market opportunities and to monitor the situation. It has been increasingly popular to set up trigger structures that involve in some way “selling high and buying low” to take advantage of any market volatility. If so, then wouldn’t it really be a good idea for pension schemes to sell some of their equities now whilst markets are high? Especially, if they do not really need to run such risk? Others might argue that equities can only go higher so keep rolling the dice, but personally I would like to bank some gains now whilst I can, and not regret that I missed the opportunity.