Q4 Investment viewJohn Leiper - Senior Portfolio Manager
What are our strongest Q4 convictions?
We are underweight bonds and overweight equities going into the 4th quarter. Known as the reflation trade, it’s a theme that has played out successfully over the year and continues to gain momentum. The return of inflation and synchronised growth are the driving forces supporting our view. Changes in US fiscal and monetary policies are leading the way and last week the White House announced proposals on US tax reform, including a corporate tax cut from 35% to 20%. This shift in fiscal policy will boost US corporate earnings and equity valuations, which will extend the bull market well into next year. The Federal Reserve has begun to unwind its QE programme and indicated that it will raise rates in December and at least 3 times in 2018. Strangely, the market is less hawkish than Fed officials, but history suggests that it’s never wise to “fight the Fed”.
As Halloween approaches, what scares us the most in the investment world at the moment?
It has been 30 years since “Black Monday” – the largest ever one-day stock market crash. The anniversary has prompted many investors to ask whether something on this scale could happen again? Then, like now, stocks look historically expensive. Today, systematic quantitative trading strategies have the potential to exacerbate a market sell-off similar to the impact of the portfolio insurance techniques used during the 1980s.
Volatility in global bond and equity markets are at all-time lows. This has driven many investors into increasingly riskier investments, leaving them vulnerable to a significant reversal back to the longer-term moving averages. This will likely manifest itself in higher bond yields and discounted equity valuations. The most likely catalyst is a policy mistake linked to the end of QE and monetary policy normalisation. To counter these concerns, we have shifted our portfolios towards historically relevant Sharpe Ratios, reduced duration across the board and increased exposure to Smart Beta equity strategies.
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.
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Welcome to the Q4-2020 ‘Quarterly Perspectives’ publication.
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.
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”.
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).
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”.
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.
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.
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.
In a speech for the history books, last week Fed chairman Jerome Powell announced a significant change to the way it conducts monetary policy by formally announcing ‘average inflation targeting’.
Despite the fact the coronavirus has plunged many countries into recession, global equity markets are now back at all-time highs, as measured by the Bloomberg World Exchange Market Capitalisation index.
In The Return Of Inflation (5th June 2020) we made the case for a transition from the existing deflationary narrative to one in which markets start to price-in inflation.
Having identified, and benefited from, the 7% fall in the value of the US dollar index since late April, we have now turned tactically cautious.