How was Q1 of 2018?
What a first quarter 2018 has been. It has reminded us that what is currently happening in the financial markets is normal and there is no such thing as a risk-free return. Equity markets since February have been quite volatile, however this is considered normal.
Throughout 2016 and 2017 we saw the financial markets being in relatively good health. They climbed up to new records and this is attributed to strong and positive economic data. The volatility we have mostly seen in the markets in 2017 is usually caused by day traders and not necessarily by institutionalised investors. As the stock markets hit record highs, it’s only normal for them to fall back a bit from the gains they made in 2016 and 2017. The volatility we have noticed this month and especially in the past week is from investors selling off technology stocks and we only need to see the NASDAQ to see how much investors are selling down, as investors dumped these technology shares amid fears about regulation of social media companies. Global markets have been hit as Wall Street normally predicts the market movements and also the recent market volatility is based on the Federal Reserve hiking interest rates by 25 basis points late last week. This has now set a new global tone as if the US increases interest rates, it is likely that the rest of the world’s central bankers would too.
Asian stocks have been impacted as well based on all of the above and on what is best described as “choppy markets” in general for global stocks. It’s interesting because we mentioned in our 2017 commentaries as 2017 being the year with low volatility and everyone being optimistic in the markets. Trump hasn’t been helping either with his comments on trade wars which is further exacerbating and testing investors sentiment. All we need to remember is that economic data is positive, and this can be reflected in the Fed’s recent rate hikes. They wouldn’t be hiking if inflation wasn’t high!!!
March 2018 Rebalance.
When we did our last rebalance in February, we held some cash across all portfolios because we were waiting for a buying opportunity to arise in the markets. Once the markets fell between 5% – 10% across the board, the investment committee wanted the lowered valuations to bring some buying opportunities, and by sitting in cash, we are now able to execute without wasting any time and buying straight into the market.
Based on this, the Investment Committee has decided to buy into the FTSE 100 UK Index. We will be applying the passive tracking instrument across all portfolios with the higher cash allowance and will bring back the cash value to 2%. Our synopsis of engaging into the passive instrument is based on the current position of the FTSE 100 being below 7,000 points and at the time of writing, it is currently at 6,972.31 points. It is important to note that the FTSE 100 index has a direct inverse relationship to Sterling as the top 100 companies in the index have their profits impacted when sterling increases based on purchasing power and purchasing power parity as all these firms are international. On this basis, given where Sterling is against the USD, it is at highs since the currency was heavily impacted by the Brexit referendum in 2016. Since then, Sterling has been increasing back up towards the point it depreciated and is currently trading at $1.415/£1. Before the Brexit referendum, it was trading at around $1.44/£1.
Now having said all this, based on where the currency is and how sensitive it is to the Brexit negations, as the deadline approaches closer (March 2019), it is anticipated by market markers that the currency will fall as Brexit will not be as nice a picture and the market hasn’t priced this in. Given that the FTSE 100 is below 7,000 points, we do expect this to hit highs again and edge upwards as the Brexit negotiations take their toll on the pound. With this inclusion of the FTSE 100 passive instrument in our portfolios, this fund will be applied next Wednesday, 4th of April 2018 across all our portfolios as we use up the excess cash we have held since 20th February rebalance.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track fall. It is without a doubt that the current volatility we have been seeing in the markets is not great, but from an active management point of view, it is quite healthy and normal given that we haven’t seen close to any volatility in 2016 and 2017. This indicates buying opportunities as well as removing market participants who are causing the short-term volatility. Holistically we are happy with our asset allocations and will maintain our firm positioning throughout this volatile period as this is the risk element of the portfolios, however the returns are still to be made and we have left the fund managers and their vast teams of investment analysts to review where the potentials are in the markets.
Given that the equity markets have fallen over the past week, the changes in our portfolios have been relatively subdued as we haven’t seen that much of an impact. This is mostly attributed to the equity and non-equity element of our portfolios and our choice of investments. Given that the equity markets have fallen under 5% across the indices that we track, the portfolios have managed to absorb the volatility which is part of our Outcome Based Investing (OBI) principles and strategy. By cyclically adjusting the portfolios, we are able to take advantage of the markets given strong conviction calls and logical approaches, such as that in the FTSE 100.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1979, our famous and well known political James Callaghan was forced to call a General Election after losing a parliamentary vote of confidence by a minority of one. The Conservative party, led by Margaret Thatcher, won the General Election and the UK had its first female Prime Minister. James Callaghan was famous for being one of the few British politicians to have served in all four of the Great Offices of State, having been Chancellor of the Exchequer, Home Secretary, and Foreign Secretary prior to his appointment as Prime Minister.
As always have a wonderful week and stay safe and enjoy Easter from us all from OCM.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager