New highs in a year of unprecedented calm
Investment markets confounded most expectations in 2017, delivering unprecedented low levels of volatility despite constant bickering between two unstable nuclear powers, weather of Biblical proportions, and a turnaround in monetary policy. Bonds did not collapse and shares continued to rise, with several stock markets hitting record highs. As the year drew to a close, the question was whether the mood music could survive Brexit uncertainties and a gradually less accommodative global monetary policy.
US rallies while global technology stocks stumble
The world celebrated the first anniversary of President Trump's election victory, and the fact that, to date, he had not started a nuclear war. Neither had he built the Mexican wall, produced an alternative to Obamacare, signed off tax reforms, or been impeached. US shares, however, appeared to have thrived off the good bits and ignored the rest, continuing to seek out new highs on a favourable economic backdrop.
In sterling terms, the US was alone in offering a small positive return. Japanese and Hong Kong indices reached their highest levels in over a decade (26 years in Japan's case), but they were unable to hold these gains and mirrored European and UK market falls of 1 to 2 percent. Early December witnessed global technology stocks being hit hard. Given the time of year, it was too soon to tell whether this was a turning point or simply profit-taking ahead of the year end.
An honest budget and a Brexit deal that could open a dangerous door
Minutes from the US Federal Reserve suggested that several members would be prepared to "look through" continuing subdued inflation and vote in favour of a December rate rise.
The only notable feature of the UK budget was the Chancellor's gloomy downward revision to previous growth forecasts. They were possibly realistic, but honesty is neither expected nor rewarded in politics. Of far greater significance were the ongoing Brexit negotiations, where a deal (in order to qualify for further negotiations) looked close, so long as the UK surrendered to all the EU's demands.
Paradoxically, the closer Theresa May gets to some form of Brexit deal, the greater the risk of "good news" being perceived as bad news. The inescapable fact is that she is going to upset people whatever she negotiates; the Irish border talks are just the most recent example. Team Europe cannot believe their luck in playing high-stakes poker with a novice, and all the signs are that any deal will be to Europe's advantage and a far cry from the hopes of Brexiteers. With the Conservatives in total disarray and no strong alternative leader, the protests of a disillusioned public could open the door to the first socialist government in decades. And that really would be bad for UK shares and bonds alike.
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 gradual shift in monetary policy, and rising political risks at home
As the year draws to a close, we can reflect on investment markets that confounded most expectations with unprecedented low levels of volatility. Despite the constant bickering between two unstable nuclear powers, weather of Biblical proportions, and a turnaround in monetary policy, bonds did not collapse and shares continued to rise, with several stock markets hitting record highs.
Looking ahead to 2018, we are seeing a gradual change in global monetary policy which is some way off from tightening but is starting to be a bit less accommodating. We believe that geopolitical concerns will remain, and possibly intensify, and that uncertainty over the eventual Brexit outcome, and a possible change in government, will most likely dominate the UK economy.
We still expect a correction at some point and feel this would be a healthy reminder that markets are not a one-way bet. However, we appreciate that an environment of steady growth with low inflation will continue to attract investors seeking returns above those offered by cash deposits.
Team Europe cannot believe their luck in playing high-stakes poker with a novice, and all the signs are that any deal will be to Europe's advantage and a far cry from the hopes of Brexiteers.
During the month we made switches across the funds, taking new positions in UK equities, commodities and absolute return. We are continuing to run diversified portfolios with lower exposure to bonds and the capacity to take advantage of opportunities when they become available.
Absolute return repositioned
We bought the Old Mutual Global Equity Absolute Return fund, switching out of the Standard Life Global Absolute Return fund.
Commodity exposure refreshed
We switched our commodity exposure from the Blackrock Gold & General fund into the Old Mutual Gold & Silver fund.
UK equity income upgraded
In the UK, the Miton Multi-Cap Income fund replaced the Standard Life UK Equity Income Unconstrained fund.
Underweight bonds, capacity for opportunity
We are continuing to run diversified portfolios, with lower exposure to bonds, and with the capacity to take advantage of opportunities when they become available.
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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