Market Commentary 10th October 2018
Another wobble in the markets?
Over the past week, we have seen the global stock markets fall across the board and sterling strengthen against the global basket of currencies caused by the 10-year US yield rising dramatically as it did in Feb 2018. That coupled with further politicking across Europe and Trumps trade war concerns has given investors cause for concern. It is without a doubt that we are in a very nervous stage in the cycle, and retail investors always are wearier over institutional investors. We have been speaking to the fund managers and economists that we employ and work with all paint a picture of confidence and because of that we have not sold any of or assets nor are we planning to as yet. The majority in fact al of them have confirmed to us that this is just another market blip, like the one we saw in February, and as such once the market gets used to the 10-year yield being at 3.25%, the rally will recommence. Interestingly if you talk to economists they forecast the peak of the 10-year yield to be somewhere between 3.7% and 4% which is not expected to happen until mid to late 2019. We are not yet therefore at the end of the party, but we are getting closer.
Should we be worried?
The simple answer is yes, and no. “Yes”, in the sense that we should be wary of the reasons why the markets continue to drop from a politics perspective and “No” because as professional investors, we should just focus on the economic data, which again continues to strengthen into this extended bull run. Again, I would like to reiterate that bull cycles don’t die of old age and it is absolutely imperative that we focus on the economics rather than the politics at this juncture of the economic cycle. We have always focused on the macro and the data which paints the picture over where we should be in the market and what is actually wrong with the core fundamentals. If the world was perfect, stripped out of any political risks, the economics would keep edging the markets higher and higher each day! This is therefore just another blip like we’ve had before in February, and we are no worried over the outcome in the long term but are weary!
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 drop significantly across the board and at the same time we have seen sterling strengthen as people invest in the UK as a safe haven and risk of a bad Brexit seem to be abating slightly. If we look at the assets in which the selloff has most occurred, we just need to look at the NASDAQ which has fallen 4% in the week having recently reached record highs as it is mostly technology focused from a constituent’s point of view. Tech stock are what have been keeping markets elevated and these are usually the most volatile stocks, so when the markets fell, this index fell the most. The selloff was exacerbated based on algorithmic trading which traders, at this point of the cycle, have reduced the range of loss, so when the markets fall, this triggers automatic trading and causes further falls. Institutional investors like pension funds tend to turn over cash into these relatively risk-free assets and not stock when the returns are good enough, that has driven down the equity markets.
What makes this worse of our portfolios is that at the same time as equities have fallen in value the safe haven assets being government debt have had significant rises in yields which causes the values to fall also so we have had a perfect storm with rising yields and falling equities, so nothing has risen. Gold which you would expect to be a safe haven has also fallen, so all in, the week has been awful across the board and there has been nowhere to hide.
With our model portfolios, these have fallen in line with the market correction and the equity has been exasperated by the movement in sterling. , however we have been able to hedge the portfolios as they haven’t fallen proportionately based on the equity and non-equity element. We will continue to keep a close eye on the risks and by constantly speaking to the fund managers understand how they are targeting their asset allocation through the next phase of the economic cycle. once the data suggests we should sell, we will execute with a high cash position to let the valuations drop, which enables us to use that cash strategy to buy back into the market when valuations have fallen. Please also note we no longer offer the passive portfolios as they are not technically the same as the active variant with lower levels of diversification and as no client is invested in them due to the risk factors and lack of diversification they are no longer reported on.
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.
As always have a wonderful week and stay safe.