Market Update - February 2018

Christopher Peel - Chief Investment Officer

 

It has been a volatile start to 2018 and much of January’s gains in global equity markets have evaporated. The overdue correction, forecasted during the last two years, has finally occurred.

This paves the way for further, long-term investment in risk assets such as equities, commodities and property. It is very important to remember that economic fundamentals and corporate earnings drive markets, not the politicians or the media. Global GDP and international trade flows are in the ascendency and this was highlighted in the recent report published by the International Monetary Fund, in which it revised its global growth forecasts upwards in 2018 and 2019 by 0.2 percentage points from 3.7% to 3.9%.

It has been a volatile start to 2018 and much of January’s gains in global equity markets have evaporated. The overdue correction, forecasted during the last two years, has finally occurred.

This paves the way for further, long-term investment in risk assets such as equities, commodities and property. It is very important to remember that economic fundamentals and corporate earnings drive markets, not the politicians or the media. Global GDP and international trade flows are in the ascendency and this was highlighted in the recent report published by the International Monetary Fund, in which it revised its global growth forecasts upwards in 2018 and 2019 by 0.2 percentage points from 3.7% to 3.9%.

The primary catalyst for the recent sell-off in equities lies squarely rooted in the bond market.

Rising inflation, the ending of Central Bank quantitative easing programmes and a tsunami of issuance in the corporate bond market are pushing rates higher. This will continue until investment grade bond yields are greater than the rate of inflation and perhaps even more importantly, higher than the average dividend yield in the stock market. Ten-year US Treasury yields have risen a massive 80bps since September and are now at the highest level since 2014. This trend is set to continue as the migration to a higher rate environment is at a very early stage. The bear market in developed country (G7) government bonds is just beginning.

The correction in equities may persist for a few more weeks or even months, but ultimately the excess leverage that had crept into the markets and contributed to investor complacency will dissipate. The decline means that company valuations have just become more attractive and cash levels remain high. Any further sell-off will be met with buyers seeking to lower their average cost of ownership and benefit from the favourable macroeconomic conditions throughout the world.

The Bank of England and the US Federal Reserve have clearly indicated that they are going to increase short-term interest rates several times this year, placing even more upward pressure on bonds yields.

Our bond holdings across the various portfolios are highly diversified, underweight duration and broadly neutral on corporate credit with an emphasis on carry trades such as emerging market local currency bonds. Our equity positions are also defensive, with an increased allocation to Smart Beta trading strategies, now approximately 18%, split between minimum volatility and multi-factor ETFs. Nearly all of our non-UK investment exposure has been, and will continue to be, hedged back to sterling, especially with the Brexit negotiations entering the next critical phase.

It is always difficult to pick the bottom or the top of an investment cycle. Our approach to risk management and portfolio construction is designed to mitigate for the “unknown” and seeks to deliver consistent, risk-adjusted returns whilst remaining fully invested. The ACUMEN Portfolios have performed well since their respective inception dates and the model portfolios within the Centralised Investment Proposition have also produced returns consistent with their stated objectives.

It can be difficult to ignore the sensationalist reporting arising from the recent correction in equity markets, but investors need to remain focused on their long-term objectives and trust the discipline of the Tavistock investment process.

This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Tavistock Wealth Limited.

Want to know more about the Equity Markets?

Please contact us here:

10 + 11 =

Recent blogs

Anatomy of an Election (So far…)

Anatomy of an Election (So far…)

The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly.

read more
Since the Market Low

Since the Market Low

The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.

read more
Canary in the Vol-Mine

Canary in the Vol-Mine

With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy. 

read more
Further For Longer

Further For Longer

On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little. 

read more
Smart Beta Unwrapped

Smart Beta Unwrapped

Our Chief Investment Officer, John Leiper, was recently invited to provide his valuable insights as part of ETF Stream’s video conference livestream: “Beyond Beta Europe Digital: Smart beta unwrapped”.

read more
Life Imitating Art

Life Imitating Art

Saturday Night Live has a reputation for expertly parodying presidential election debates. My all-time favourite is Al Gore (Darrell Hammond) versus George Bush (Will Ferrell) and this year didn’t disappoint with expert performances from Donald Trump (Alec Baldwin) and Joe Biden (Jim Carrey).

read more
Emerging Markets: ETF Stream

Emerging Markets: ETF Stream

Our Chief Investment Officer, John Leiper, was recently invited to provide his valuable insights into emerging markets as part of ETF Stream’s video conference livestream: “Big Call: Emerging Markets”.

read more
The Call-Up

The Call-Up

Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission.

read more
Let’s Get Cyclical, Cyclical

Let’s Get Cyclical, Cyclical

The following is an abbreviated version of my recent article ‘A Deep Dive Into… UK Equities’ for Investment Week magazine. Follow the link and read my views on page 17.

read more
Technical Perspectives

Technical Perspectives

In last week’s blog we discussed the ‘Nasdaq whale’, Softbank, and the role it played, alongside an army of retail investors, driving tech prices ever higher prior to the recent correction. These short-term ‘technical’ flows are driven by the options market as traders look to hedge their underlying exposure, amplifying moves both lower and higher.

read more