Consolidation after the rout, but positive returns remain elusive
After October's stock-market rout, November marked a period of consolidation with most equity markets ending slightly higher. The US and Japan rose by just over 2% in sterling terms, Europe was flat, and further Brexit worries sent UK shares marginally lower. After several months of relative underperformance, emerging markets rallied by around 6%. Bonds showed small losses, but oil took the headlines with a collapse of more than 30% over the past two months.
The Fed softens its tone as European politics fracture further
The US Federal Reserve toned down its stance on interest rates. Minutes from the last meeting showed that members remained in favour of a December rate hike but were less certain of the path for rates in 2019. Previous expectations had centred on a further four 25-basis-point hikes the following year. Fed Chair Jerome Powell amended his October comments that interest rates were "some way below neutral", now judging them to be "just below the broad range of neutral".
Europe was beset with one crisis after another. On the economic front, forward-looking surveys continued to suggest that the rate of growth was slowing, and German data recorded negative growth for the third quarter, though this was attributed to several one-off factors. Politically, Chancellor Merkel was no longer the leader of her party, the Italians had conceded ground on their budget proposals though the matter was far from resolved, and the French took to manning the barricades and calling for President Macron's head. In Spain, for the first time since the death of Franco, a far-right party won seats in a regional election.
Brexit deal met with disapproval from all sides
Theresa May agreed terms with the EU, but the deal met with disapproval from all sides in the UK. For all the bluster, no credible alternative was offered, and this continued to take its toll on businesses, which showed further contraction in investment and confidence at its lowest since 2009. On the plus side, unemployment remained at 4.1% and wage growth at 3.2% exceeded the rate of inflation.
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
Monetary tightening returns genuine price discovery to markets
Positive returns had been difficult to achieve in 2018. There was no outright collapse in prices but, to date, over 90% of asset classes had lost money. The year was on course to be the first in which every single asset class failed to keep pace with inflation.
The maturity of the economic cycle, most evident in the US, was causing much speculation on the timing of the next recession, but with unemployment, inflation and interest rates at historically low levels, this did not look as imminent as investor behaviour would suggest. There was a well-argued case that the decade-long bull market was over, supported by increasingly negative technical indicators. Equally, it could be said that the global economy remained in fine shape and was merely returning to trend after a period of above-trend growth.
Global asset markets had repeatedly lurched from optimism to pessimism in their interpretation of world events, often overreacting in either direction. Prime examples included the likely effects of President Trump's on-off trade talks and whether the Federal Reserve's anticipated pattern of rate hikes would kill off growth or lead to rampant inflation. Neither had happened, but market volatility had hit the highest levels for some time. The US stock market had suffered two corrections of greater than 10% during the year, and losses on other markets had been worse.
The undeniable overriding factor was that monetary conditions were tightening. In the absence of central-bank support, genuine price discovery was returning and, with opinion on the future direction of markets so divided, was leading to an increase in price volatility. This did not make a bear market more certain, but it did mean we needed to be prepared for greater, and more frequent, price movements.
Over 90% of asset classes have lost money this year, putting 2018 on course to be the first year in which every single asset class failed to keep pace with inflation.
We remain overweight UK equities, which has detracted from performance given the Brexit uncertainty, but which we think offers better value than most other markets over the longer term.
Overweight UK equities
We remain overweight UK equities. The Brexit uncertainty has weighed on performance, but we believe the UK offers better value than most other markets over the longer term.
Adding risk during weakness, with a value focus
During the recent weakness we added a bit more risk across the portfolios, with a particular focus on value.
Underweight fixed interest
We remain underweight fixed interest, preferring equities, property and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.
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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