Creating value for fund managers and more particularly for long-term investors is becoming a tough challenge.

Macroeconomic uncertainties mixed with a complicated political calendar and an increase of threats from developed to emerging markets are the main reasons for this situation. Unfortunately, this is not going to change on the short or medium-term.

Regarding economic perspectives, the situation is confused.
In the US, the Presidential election will not improve anything, whatever the winner. Both candidates have no chance to get any majority in Congress. Indeed, on 8 November, Congress also will be renewed (34 seats out of 100 in the Senate and all the 435 seats in the House of Representatives). According to the pool, the Republicans will keep the hand on the both Chambers. They will not certainly support the unpopular Hillary Clinton, and regarding the campaign, it is unlikely that Donald Trump can build a majority. The FED will remain the primary economic decider. But at this stage of the business cycle, we are not going to see any coming back to a “normal situation” soon. Likely, we will have a very gentle normalisation.

In the UK, concerns are rising about the cost of the Brexit and about the ability for the New Prime Minister to act quickly and with efficiency. Bankers and businesses have urged Theresa May to clarify her view. On the sly, moves have already started. In Dublin, Google, Yahoo and other IT companies are pushing rent to record high since 2008, as apartments and houses are booked for employees. Without clarity, the financial industry could follow with a more negative impact on the economy. This week Scotish Prime Minister announced the preparation of a second referendum which could sign the end of the Great Britain.

In the Euro area, the Brexit, the migrant crisis and an anaemic growth are reinforcing conservatism and extreme-right parties. The ECB cannot continue to do the job alone, and this was Draghi’s message at the last ECB meeting. A referendum in Italy could bring down Renzi’s government. Spain is still without a majority in Parliament. The French Presidential election in few months could put an end to the European Union as we know it.

On developing countries, a less stronger dollar, a flow of liquidity and lower valuation should support this asset class. However, the picture also is contrasted
On Eastern Europe, the shadow of Moscow is increasing. The relationship between the Western world and Russia has never been so bad since the cold war. The survival of Democracy in Turkey is seriously in doubt since the right/false coup against Erdogan President.
In middle-East, Saudi Arabia is facing a severe economic crisis threatening its banking system but also the all-region. The re-emergence of Iran in the concert of nations has exacerbated the tension between Shiites and Sunnites which have vast implications in the Muslim world.
In South America, the stabilisation of commodity prices and the hope for some improvements in term of democracy in countries like Brazil should support the economies.
Most of the light is coming from Asia, where despite some tensions in China’s sea and on the North Korea border, growth is improving. It is possible to find in Asia more political and economic stability than in the rest of emergent world. The diversity of the economies from Malaysia to Taiwan or the Philippines are pushing for an increase of allocation in Equity but also in Fixed incomes market.

Despite a complicated geopolitical world, contrasted macroeconomic conditions, the flow of liquidity should continue supporting equity market. Until Equity delivers a better return than Bonds, it is hard to be short on global equity, except to anticipate the explosion of a systematic risk, which could happen tomorrow, after tomorrow or never.
However, this uncertainty will translate into higher volatility, sharp trends and some hysterical movements.

Another element has to be taken into consideration. Indeed, in a lot of markets, we notice an increase in inflation. This inflation makes different faces. In the US, it is the result of a full unemployment situation, so inflation is coming from wages, and it should be translated to an increase of consumption. Let call that, the “good inflation”. In some emerging markets, we have observed a similar phenomenon; growth is pushing salaries up.
In Europe, higher energy prices combined with a weak growth are driving non-core inflation up, eroding purchasing power. It is negative or “the bad inflation”.
In the UK, it is the worst situation. The fall of the pounds, the high-level uncertainties due to the Brexit are driving inflation up; it is going to affect the first driver of the growth: the consumption. It is the “Ugly inflation”.

A real diversification implementing through a strategic and a tactical asset allocation is necessary to provide an adequate return to clients. The weight of emerging market should be increased on the Fixed Income and Equity sides. On the developed market value stock with high visibility, sensitive to the curve and paying high dividends should continue to perform well. The commodity is an interesting asset class where a lot of diversification and decorrelation from the risk premium can be found.
Using vehicles driving by volatility like some CTA and Trend following is a good way to protect a long portfolio against short-term movements.
Finally, some products against a rise of inflation should be implemented.