Tom Clarke, co-portfolio manager on William Blair’s Dynamic Allocation Strategies team, discussed how he navigates geopolitical uncertainty in a recent CNBC appearance.
One way Clarke seeks to take advantage of this uncertainty is by finding areas around the world where macro developments have de-escalated risk, such as when Turkey’s president, Tayyip Erdogan, “played chicken with the markets and lost,” he said.
“The result of that is the threat power that existed there with respect to a political leader undermining monetary policy has largely gone away, and it’s one thing you don’t really need to worry about too much anymore,” said Clarke.
The current market environment is full of deliberate uncertainty, which the markets don’t like.
Clarke also gave the example of Brexit. He explained that the border issue between Northern Ireland and the Republic of Ireland is creating consensus and pushing all parties involved with different agendas toward the path of a softer Brexit.
According to Clarke, taking this approach to geopolitical uncertainty can help with allocating risk in the markets.
Another way Clarke navigates geopolitical uncertainty is by de-risking the portfolios he manages. “We’ve run a lower level of active market and currency risk in the portfolios than we normally would if this source of uncertainty wasn’t ever present, either at the surface or just below the surface,” he said.
Clarke also discussed how U.S. President Donald Trump’s tendency to reverse his statements causes a great deal of unpredictability. In light of that, markets are less sensitive toward his more recent threats and bluffs.
“I think the logical response is to fade the impact of what any particular announcement or tweet might be,” Clarke commented. Clarke went on to say that the current market environment is full of deliberate uncertainty, which the markets don’t like.
“It’s the opposite of what central banks try to do, which is to reassure markets and not provide surprises and let them know what they’re doing to do and then do it. This is the opposite of that.
It does make it very different and particularly difficult to navigate, and it means that one needs to be extremely aware of the potential triggers for market downside,” said Clarke.
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