New highs all round, with a familiar cast of characters
The past month has witnessed dizzy new highs in the UK, US and several European stock markets as the US dollar climbed to a twelve-year high on a trade-weighted basis. Russian equities gained a further 13% in sterling terms, whilst Japan, Europe and the US rose by between 2 and 3%. Interest rates around the world have continued to track inflation lower, central banks have begun buying bonds in earnest, and the perennial Greek drama has produced another act. Markets remain difficult to predict, but central banks are making it a brave proposition to bet against them.
The ECB starts buying as inflation turns negative
Interest rates around the world have continued to track inflation lower, although the most notable exception is the United States. Despite inflation falling to minus 0.1%, US rates are expected to rise during the summer in response to further falls in unemployment. In the UK, the latest Inflation Report conceded that core inflation was likely to turn negative in the spring.
The European Central Bank began its bond-buying programme during the month, sending several European benchmarks to record low yields. The ECB has stated that it will not buy bonds yielding less than the official deposit rate of minus 0.20%, a restriction that could yet prove awkward for the German central bank in particular.
Finally, a quiet milestone: the UK's official interest rate has now remained at 0.5% since March 2009. Happy sixth birthday.
Athens blinks, then crosses its fingers
On the face of it the Greek government was unable to hold the steely Germanic stare and blinked first. A bailout extension was agreed as the Greeks rolled over and played submissive, only to later tell their electorate that they had crossed their fingers when promising to repay their debt. This one will continue to run, with the Germans showing little compassion or patience.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Brave to bet against central banks, but the dollar gives us pause
Markets remain difficult to predict. Valuations suggest that both equities and bonds are more than fairly valued, but that was much the case a year ago and has not prevented markets from climbing. Whilst central banks continue to manipulate markets it is a brave move to bet against them, and sitting in cash waiting for a market fall requires plenty of patience.
The ECB's decision to restrict bond purchases to only those yielding more than the official interest rate of minus 0.2% could lead to a sticky situation for the German central bank. The majority of eligible German bonds are short maturities and these have negative yields as far out as seven years. The ECB may be forced to either push the interest rate further into negative territory or to start buying investment-grade corporate debt.
We have concerns over the continued strength of the US dollar. Firstly, it is hurting US exporters, with manufacturing orders now in decline for six consecutive months. Secondly, the world is riddled with debt and a large amount of it is denominated in US dollars, so it is getting bigger by the day. Thirdly, historically a strong dollar has seen a withdrawal of money from emerging markets, leading to a collapse in local stocks, bonds and currencies. Although many countries are better prepared this time, with larger currency reserves and more debt denominated in local currency, there remains a shadow over the sector.
Whilst central banks continue to manipulate markets it is a brave move to bet against them
We are happy with how our portfolios are positioned. The current allocations are designed to participate in further gains whilst having some defensive qualities to cushion against sharp market falls.
Absolute return: diversifying risk
We are currently invested in two to three absolute return funds across our portfolios. They offer exposure to strategies that we would not normally access and have all made positive returns year to date. We are pleased that the funds are clearly running different strategies, which helps to diversify risk further. It is worth noting that these types of funds do not rely on rising markets to make a positive return.
Fixed interest: positioned for European QE
Whilst we prefer to be underweight in fixed-interest bonds, our holdings in funds such as the TwentyFour Dynamic Bond fund have been positioned to benefit from QE bond-buying in Europe. This fund has gained over 4% year to date.
Keeping powder dry for opportunities
The year has already seen an increase in volatility across asset classes, although this has been mostly biased to the upside. We expect a reversal in markets at some point and are keeping a portion of our portfolios in low-risk absolute return funds, ready to switch into good long-term investments when opportunities arise.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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