Looking for the positives in markets
There’s an old market saying, “if it’s in the press, it’s in the price”. It’s all too easy to get swept up in the moment and to think that the news flow we see around us right now sets the tone for tomorrow, rather than gets reflected in prices today.
And today’s headlines are certainly causing global markets to be awash with fear right now. Did Iran and/or its proxies just blow up some key Saudi Arabian oil infrastructure? Did the US House of Representatives just start impeachment proceedings against President Trump? Have recent manufacturing indices been shockingly weak across the board? Is the US economic growth engine sputtering as well now? Did we really see an inversion of the US yield curve (normally a reliable recession indicator) only six weeks ago? Was the British Prime Minister found guilty of illegally proroguing parliament? Has President Trump escalated his trade war with Europe, while simultaneously threatening the withdrawal of access to US capital markets for internationally quoted Chinese companies? Are the riots in Hong Kong getting worse?
Politically, economically and financially, the world feels a scary place right now. And that equals all-round nervousness for investors. Equity markets over the last few days have fallen away and given up all the gains they had made in September. The major US and UK indices have both fallen by 5% over the last fortnight, Europe and Japan have dropped by slightly less, along with emerging markets, but the mood is sombre. Bond yields have fallen as investors have sought refuge in safe-haven assets. The UK 10-year Gilt yield has dropped from around 0.7% to below 0.5%, and the US equivalent from around 1.8% to nearly 1.4%.
So, what is there to make us feel positive about markets?
Rather than get swept away by the negative news flow, let’s look at some of the positives – particularly what the central banks are doing.
The European Central Bank followed the US Federal Reserve (Fed) and cut rates last month and resumed its quantitative easing (QE) programme to support markets. It seems likely that the Fed will cut rates again at its October meeting in a fortnight’s time. This is even with the positives of very low unemployment and some incipient signs of wage inflation. Over here, the tone from the Bank of England is increasingly dovish, and many expect it to reverse at least one of the two 0.25% increases it put through last year.
And looking back, it certainly didn’t ‘feel’ right to buy the market on 3 March 2009 when it seemed like the financial world was about to end; RBS was 45 minutes from insolvency and the global economy was in meltdown. But as we recall the saying, “if it’s in the press, it’s in the price”, this was in fact the best time to buy the UK equity market in the last 12 years. In the 10 months to 31 December 2009, UK-listed shares generated a total return, including dividends, of around 60% from their lows. Over the 10.5 years since, they have risen only by a further 100%.
While we’re not in the depths of early 2009 today – not by a very long shot - worldwide monetary and fiscal responses continue to support markets, and ultimately, as another saying goes, ‘don’t fight the Fed’. These central bank measures mean more liquidity hunting for risk assets, and for the time being we’re confident equity markets will be higher in a year’s time than they are today.
Measured market optimism with insurance policies in case things get worse
Having said that, it’s always important not to keep all your eggs in one basket. So, although we retain a full weighting towards equities and have equity-related exposures in both the fixed interest and alternatives assets, we must acknowledge the severity of the multiple threats facing markets today.
In conclusion, we understand the nervousness besetting asset markets at the moment and have taken out a couple of insurance policies just in case things get even worse from here. But overall, we remain well-exposed to risk assets in general. If we see a sharper pull-back in equities from here, all else being equal, we are more likely to add to exposure than reduce it.
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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.