Investment Conundrums: Pacific AM's Bartleet On Why His Single Largest Concern Is Complacency In Markets

Bartleet said he was preparing his portfolios for a more hostile environment this year compared to the ‘Goldilocks' characteristics seen last year. 

He also warned a sharp pick-up in inflation was the biggest short-term risk to markets, while over the long term he is concerned about navigating his portfolios through the normalisation of monetary policy.

In October 2017, the Federal Reserve began scaling back its $4.5trn balance sheet, while new Fed Chair Jerome Powell earlier this month signalled four potential rate hikes this year.

"Rising interest rates in the US and the withdrawal of stimulus around the globe is likely to have a profound effect on markets," Bartleet said. "This year, global QE will be some $1.2trn less than its peak level in 2016. 

"The key issue on a longer-term basis is that both bonds and equities are expensive; valuations only appear reasonable to us when they are compared to cash.

"So, although liquidity conditions remain supportive, that is changing and is likely to lead to a repricing of both fixed income and equity markets." 

Managers warn unwinding European QE could burst 'the mother of all bubbles'

One asset class in particular which Bartleet flagged as a danger was government bonds, which performed well in the past two bear markets.

On a long-term view, he fears bond and equity markets could also both be impacted, saying it is key to diversify away from these areas.

"Our single largest concern has been complacency in markets and that risks are not being effectively priced in.

"Acutely overpriced developed market government bonds have pushed investors up the risk curve to generate the returns that they were used to achieving in the past.

"The recent bout of volatility is a healthy reminder of the risks that have been masked by monetary stimulus," he added.

In response to this concern, Bartleet said he was positioning his portfolios in "diversifying assets" such as absolute return and alternative risk premia funds that are "genuinely uncorrelated" to equity and bond markets.