More than 70 years of hard work in creating the post-war, rules-based systems of trade and mutual self-interest is in danger of being thrown away, RIT Capital (RCP) chairman Lord Rothschild has warned.
Writing in the full-year results for the £2.7 billion investment trust, he added that the portfolio was likely to maintain the defensive posture it has adopted in the past year, having run down its equity and sterling exposure, adopted a short sovereigns position, and upped its absolute return allocation.
‘Since the last World War, we have enjoyed some 70 years of patiently crafted international cooperation, which is now threatened,’ Lord Rothschild wrote.
‘Against this deeply worrying geo-political situation one can point to a number of positive investment factors, for example in the US, the proposed tax reduction for companies and individuals, reforms of an over-regulated system and increases in fiscal and infrastructure expenditure.
‘These, however, come at a time late in the business cycle, when the labour market is close to full employment, with wage increases up by some 4% over the last few months.
‘Valuations are at the high end of their historical range, inflation is returning and in these circumstances, it is likely that interest rates in the US will rise meaningfully.’
Active currency positioning proved to be a significant contributor to full-year performance, returning 9.6% on a total portfolio return of 12.1%, as dollar exposure rose to almost two thirds of assets.
The shares currently trade at a premium of 4.8%, down from close to 8% last summer in the wake of Brexit.
Both the beginning of the Brexit negotiations next month and the fallout from the departure from the European Union were likely to keep the portfolio on the defensive, Lord Rothschild added, although over the long term a deterioration in the terms of trade between the US and China may be more damaging.
‘The impact on China of either straightforward tariffs or of a "border-adjusted tax" would be negative, at a time when Chinese economic momentum is fading and when it has to deal with the problem of misallocation of capital on a huge scale.
‘China will be choosing between becoming a more open or closed society and while its economy transitions from industrial growth and exports to being more consumer-led.
‘In these circumstances, our positioning is likely to remain defensive, with an emphasis on returns uncorrelated to the overall performance of equity markets.
‘The success of our asset allocation depends on capturing the right market themes, the excellence of our external managers, stock selection, private investments and a continued emphasis on absolute return and credit strategies.
‘At this time of upheaval and uncertainty, our investment portfolio will continue to be well diversified. There could well be a period ahead of us when the avoidance of risk is as high a priority as the pursuit of gain.’