A new era of monetary tightening tests investor confidence
A hardening of attitude among central bankers sent a chill through stock markets, resulting in a big step up in volatility. The new era of gradual monetary tightening faced challenges from several major central banks, while President Trump's announcement of steel and aluminium tariffs added a further source of uncertainty.
Markets fall as central bankers signal tighter policy
The UK stock market lost 5% over the month, having been down nearly 10% in early February. Most other markets fared better in sterling terms, showing losses of 2-4%. UK fixed interest bonds fell by around 1%, with corporate bonds falling by more than government bonds.
The new Chair of the Federal Reserve, Jerome Powell, surprised investors with his straight-talking, using his inaugural speech to express his view that the US economy had strengthened in recent months and signalling the likelihood of interest rates rising by a further 1% in 2018.
The Bank of England's Monetary Policy Committee used its quarterly inflation report to warn that if the economy were to evolve in line with their projections, monetary policy would need to be tightened earlier and by a greater extent than previously indicated. This was taken as hinting at a 25-basis-point rise in May.
ECB discontent grows as Trump raises the spectre of a trade war
Murmurings of discontent from the European Central Bank were getting louder, with some members pushing for an end to the quantitative easing programme that year. The problem remained that whilst growth appeared to be strengthening, inflation was slipping further from the "2% or just under" target that the Bank is mandated to uphold. Meanwhile, the Governor of the Bank of Japan spooked markets with comments suggesting a beginning to the end of their bond-buying in April 2019, though he later clarified that this would be dependent on inflation reaching the projected 2% target.
Never far from the headlines, President Trump announced plans to impose stiff tariffs on imported steel and aluminium. The move was universally unpopular, leading to the resignation of his top economic adviser Gary Cohn, and provoked an immediate announcement of retaliatory measures from the European Union.
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
A healthy pullback, but political risks are building
We view this recent pullback in stock markets as both desirable and healthy. The increase in volatility has more to do with asset valuations than a deteriorating economy. Global economic growth remains resilient but at risk from political interference. On one hand, President Trump's tax stimulus risks turbo-charging an already hot economy with the consequent risk of higher inflation leading to higher yields and therefore lower prices. On the other, the President's desire for a trade war poses a risk of deteriorating global growth, which will reduce the corporate earnings already factored into share prices.
One of the more interesting points from the recent Bank of England meeting was the change in rhetoric from Governor Carney. His statement that "the Bank was no longer willing to tolerate inflation above the 2% target for the next three years" was a significant departure from his previous emphasis on "looking through" above-target inflation because safeguarding jobs in the UK was his priority. It still felt unlikely that rates would rise by much given the ongoing uncertainty over Brexit, but with rate expectations at such low levels, even a small adjustment could unsettle investors.
It was too soon to tell how significant the resignation of Gary Cohn would prove. President Trump's top economic adviser, formerly of Goldman Sachs, was highly regarded as a rare voice of reason in the White House. Whilst we had become accustomed to the almost comical departure rate of Trump's staff, there was a feeling that this one mattered; he was the markets' man on the inside who would guide the President from doing anything too rash. The implication of Cohn's resignation was that Trump was serious about embarking on a trade war and had further measures in mind.
For income-seeking investors, bonds and equities compare favourably with the low return on cash deposits. The overriding question, however, is how well central banks manage their withdrawal of funds from the markets and whether investors require a risk premium to compensate for this lack of support.
The increase in volatility has more to do with asset valuations than a deteriorating economy.
We did not make any changes during the month but have set levels where we think it would be prudent to further reduce risk. Equally, we have set a level that we think represents a decent buying opportunity for the longer term.
Risk management thresholds in place
We have set levels where it would be prudent to further reduce risk, as well as a level that represents a decent buying opportunity for the longer term.
Patient holders of Woodford
Our meeting with Neil Woodford was reassuring and we will remain patient holders of his income fund.
Diversification softening the blow
Most funds fell over the month, but our policy of diversifying risk softened the blow. On the higher-risk portfolios, the Neptune Russia fund rose by over 3%, putting it 10% higher over the three-month period. Across our portfolios, property and some of the absolute return and bond funds showed small gains.
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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