BNY Capital Market Perspectives

Betting on the Unknown

We are all ultimately risk managers, using our models, experience and best guesses in discerning the path for asset classes. Given the large moves since the elections, one would presume a strong commitment to the trends driving these various asset classes. Instead what strikes us is how little confidence most people have with how various large themes will evolve this year. We include ourselves in this camp, with the priorities of the incoming administration, the evolving role of the central banks, and the evolution of Brexit as some of the more perplexing topics to ponder. While the reflation trade has merits, we have been impressed by the extent of the moves across many asset classes given the lack of details as well as the lack of historical precedence with which to base any strong conviction. One can certainly argue that keeping details dear is in and of itself a political strategy, and we would not adamantly argue against either the strategy or its effectiveness. For instance, the process around Brexit remains on our list of wildcards as there remains few details on the exit process more than six months after the vote. This lack of granularity has nonetheless not deterred the FTSE from trading over 20% higher since the vote, which saw a very short lived decline turn to almost constant gains since mid-June. There is a life to this strategy however, as investors eventually become inpatient with the lack of progress or information. This was again on display with Brexit this week, as the GBP traded down four figures during the past week purportedly on the lack of any plans in the face of tough rhetoric from the EU.

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