A third month of volatility and new records that would not stick
Market volatility continued for a third consecutive month. Stockmarkets in the UK, US and Europe reached fresh record highs but all ended below their peaks. Japan made a fifteen-year high and gained around 6% in sterling terms; the US and Europe were up between 2–3%. The UK’s FTSE 100, however, suffered from vertigo as it hit 7,065 and ended the month nearly 2% lower. In fixed interest, arguably the most overvalued asset class made further gains as the European Central Bank continued its bond purchases: UK conventional gilts gained 2%, whilst the index-linked variety rose by 3.75%.
The Fed opens the door with one hand and closes it with the other
The US Federal Reserve mischievously changed the text of its statement to accommodate a rise in interest rates whenever it deemed appropriate, but then lowered its forecasts for growth, inflation and the projected path of rate rises. The result was a confusing signal that left markets guessing at the true direction of travel.
Meanwhile the European Central Bank stuck some more money in the bond charity box, adding to its already substantial programme of asset purchases. The topsy-turvy world of fixed interest continued: government bonds made further gains despite already stretched valuations, with UK conventional gilts up 2% and index-linked gilts rising 3.75% on the month.
Pre-election posturing overshadowed by the Fed
The UK Budget proved to be little more than pre-election posturing and in market terms was overshadowed by the US Federal Reserve meeting later the same day. With the UK election campaign now officially underway, there are risks that random quotes will unsettle equity sectors—banks and utilities are usually the fall guys—and, on a larger scale, could see swings in the UK’s bond and currency markets.
On the geopolitical front, fresh conflict in Yemen caused a spike in the oil price and unsettled equity markets, whilst Greece continued to successfully negotiate nothing new and had little effect on bonds or equities. The whole affair of Greece and Germany trying to negotiate some form of settlement has become such a massive yawn that there is a danger of crying wolf once too often. At some point something significant could happen, but it could take a while before the full implications hit home.
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
Volatility is warranted, and the United States gives us pause
We feel that the current volatility across markets is warranted and expect it to continue and probably increase. The fall and rise and fall again of the oil price adds to the uncertainty. Most of the moves are due to markets becoming increasingly overvalued relative to their earnings outlook but still supported by central bank buying. The perverse situation remains that poor data is taken to suggest Quantitative Easing and lower interest rates will stay in place for longer, which is good for bonds and equities, and consequently good data is bad for equities.
We have some concerns that the country supposed to be leading the world out of recession, the United States, is stalling. This may be a temporary lull hurt by the snowy winter, but of all the major data classes only the employment data is coming out stronger than forecast.
With the level of central bank manipulation it is impossible to call the top in any market, but we expect a reversal at some point and are keeping a portion of the portfolio in low-risk absolute return funds, ready to switch into good long-term investments when opportunities arise.
Poor data is good for equities and good data is bad—the perverse logic of central bank dependency.
We continue to favour equity income funds, absolute return funds and a relatively high weighting in commercial property. After further stockmarket gains and with the UK general election approaching, we have reviewed the level of risk we are comfortable running and reduced exposure on our higher-risk portfolios.
Reducing US equity exposure on higher-risk portfolios
On our higher-risk portfolios we switched out of the M&G Global Dividend fund, which is over 50% invested in US equities, into the less volatile Standard Life UK Property fund. This reflects both our concerns about the US outlook and the election-related uncertainty ahead.
UK equities still offer value
We think that UK equities offer better value than most markets and are well placed to benefit from a growing economy. We accept that uncertainty during, and possibly after, the general election could cause some underperformance but feel that further gains will come once the politics are sorted.
Dry powder for the reversal
Last year we positioned the portfolios to benefit from further market gains but with less volatility than the market, using a combination of equity income funds, absolute return funds and commercial property. We are keeping a portion in low-risk absolute return funds, ready to deploy 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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