Diminishing global liquidity calls asset valuations into question
March brought another volatile month and a further leg down in global stock markets. US indices fell into correction territory as technology stocks suffered a backlash, geopolitical tensions escalated and the prospect of a trade war between the US and China spooked markets. With monetary stimulus being withdrawn, the valuation levels underpinning markets were increasingly being called into question.
A broad sell-off as tech stumbles and geopolitics flares
In sterling terms, US shares ended the month 4% lower, with European, Asian and Japanese indices faring only slightly better. UK stock markets fell by around 2%. Fixed interest bonds had a mixed month: government bonds gained up to 2% whilst corporate debt ended around 1% lower.
A scandal involving Facebook's use of personal data, Uber's first fatal crash with a self-driving car and President Trump's Twitter war with Amazon created a blizzard of bad publicity for the technology sector, which had previously been the driving force behind the meteoric rise in US stock markets.
North Korea proposed summits with South Korea and the United States, with the possibility of talks on denuclearisation, but there was little respite on the geopolitical front. Newly re-elected President Putin's spat with the UK escalated into widespread tit-for-tat expulsions, and the United States announced further sanctions aimed at rich associates of Putin. Simmering tensions over trade tariffs boiled over as the United States and China upped the ante, though it was worth noting that this was not yet a trade war, merely a lot of posturing ahead of serious negotiations, as illustrated by Trump's retraction of most of his previously announced metals tariffs.
The Fed raises rates as stimulus is withdrawn on multiple fronts
The US Federal Reserve raised interest rates and indicated that their current thinking included an additional rate hike in 2019. Both the Federal Reserve and the European Central Bank increased their 2018 forecasts for domestic growth, and the ECB also removed its explicit commitment to buy more bonds and expand its quantitative easing programme if necessary. In the UK, the Bank of England voted to hold rates at the current level as expected; however, two committee members favoured raising rates immediately, which took investors by surprise.
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
The parabolic rise in asset prices looks to be over, for now
Recent share price falls have been attributed to several factors: a rise in geopolitical tensions, the prospect of a Sino-US trade war, and signs that economic growth may have peaked. But there is an alternative explanation, which is that in an environment of diminishing global liquidity, the valuation levels in markets are increasingly being called into question.
There is no doubt that monetary stimulus is being withdrawn and, in some cases, monetary tightening has begun. The US Federal Reserve and the Bank of England are on an established path of gradually raising interest rates. In the United States the bond-buying programme is being reversed through quantitative tightening, and although in Europe monetary stimulus continues at a reduced rate, there looks to be little justification for this to continue into next year.
The withdrawal of monetary stimulus has coincided with a marked increase in volatility. For years, there had been a complacent view that any sell-off in shares or bonds would be countered by central bank buying, effectively creating a legitimate false market. The rationale that "the worse the news, the greater the likely central bank stimulus" encouraged a "buy the dips" mentality. The gradual withdrawal of this support gives investors more confidence in expressing a view on asset prices in either direction.
February and parts of March witnessed indiscriminate selling, mostly of more liquid investments, across markets. But once the initial panic subsided, investors began to differentiate between overvalued investments and those that had previously been left behind or were more suitable to the new environment. We saw signs of this with technology stocks being switched into more defensive utility shares.
The global economy and investment markets have moved on to the next stage. This is not necessarily negative. The parabolic rise in asset prices looks to be over, for now at least, but it is too early to tell whether the increase in volatility will drag markets lower or simply produce more frequent price swings, creating opportunities for buyers and sellers within a range.
In an environment of diminishing global liquidity, the valuation levels in markets are increasingly being called into question.
Our portfolios have been constructed to withstand periods of higher volatility. We spend a lot of time selecting funds that, when combined, produce robust portfolios that track a steadier path than the underlying markets.
Diversification softened the blow
There were few hiding places last month, with most asset classes showing losses. Our policy of diversifying risk softened the blow, and across our portfolios, property and some of the absolute return and bond funds showed small gains.
Built for higher volatility
Our portfolios have been constructed to withstand periods of higher volatility. We spend a lot of time selecting funds that, when combined, produce robust portfolios that track a steadier path than the underlying markets.
Dealing targets set, none triggered
We have set targets where we think it would be prudent to further reduce risk. Equally, we have set a level that represents a decent buying opportunity for the longer term. Despite the increased volatility, none of our dealing targets were reached during the month.
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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