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A meek market?

The view from our Chief Investment Officer

12 April 2019

1 minute read

Will Hobbs discusses the recent bounce in equities, our outlook for the US bond market, and what they mean for your investment portfolio.

Toby: Hello and welcome to another edition of Monthly Market Insights, with me as ever. I’m joined by William Hobbs, our Chief Investment Officer. So Will, the month of March was a bit of a pickup, certainly for the UK market, the FTSE-100, the 100 largest stocks traded in the UK. What was driving that?

Will: Tobes it was a global story. So what you found is that equity in developed and emerging worlds have done all right over the month and actually what you found is: it's not just equities; it’s almost everything. It’s what’s called the Goldilocks month where everything goes up. It probably won’t remain the case but I think that probably part of that story or part of the message from that would be to tune out. For global investors: tune out Brexit. It’s not the first time we’ve said that. But certainly as the Brexit situation seems to deteriorate, markets have again.

Toby: I was going to say exactly that, that as Brexit has come even more to the fore, it has become more critical to the citizens of the UK. You’ve been saying to me now for a number of months that this is a political problem not an economical problem and the market certainly seems to be bearing that out. Now another element that has been a bit of a drag over the past few months for the citizens in the UK but not so much for portfolios is of course that foreign currency translation effect. But we have seen US dollar weaken slightly against sterling haven’t we a bit of strength in sterling over the last month. What’s been causing that?

Will: The problem with sterling at the moment, and I think you alluded to that, is that Brexit might not be a global economy problem, but it’s certainly something that’s relevant for the UK economy. It’s just not relevant for the world’s capital markets I think. If you look at sterling the problem that you have for sterling traders at the moment is that a lot of it is down to headlines. Incoming headlines on Brexit, one way or the other, whether Parliament decides to vote through or not vote through stuff, sterling is reacting. And from our perspective, And from our perspective, it’s probably worth standing aside. We’re holding a position quite close to our benchmark at the moment; We’re not taking strong views on directly related assets to Brexit. We’re standing aside and letting it play out.

Toby: Now another one of those measures you frequently refer to is the volatility of underlying stocks. And of course last year the big thing was that the year ahead was going to be a bumpy road. That of course is the expression of volatility. Now you’ve told me in the past that it’s the VIX index that you would look at, that measure of volatility in the US. Of course when we were looking back in January that spiked up to a level of about 35, quite high. I looked just before we came in today and that’s trending around 14-15, which again is historically low. So what are the factors that are dampening down volatility and providing those efficient markets for people to trade in?

Will: Well, I mean there’s all sorts of things behind this. I think if we look at what’s going on in the economy at the moment, and look at the story that's been happening in markets - we’ve talked about this a lot on this forum -you had a very dark time in December as people started getting ready for the next recession. You’ve had the best start to the year for risk assets for many decades. As people/investors generally have started to reprise a little bit of growth, what you’ve found is the Federal Reserve, amongst other central banks have also changed their tone a bit. The Federal Reserve in particular has stopped saying we’re going to raise interest rates at all. And so markets seem to have taken some solace from that. There are some areas to us which still look a bit disconnected from reality, particularly the bond market. We think the outlook for growth and inflation implied by the bond market, particular those in the US and the rest of the world, not so much UK, is way too meek relative to what we see as likely in coming reality. But otherwise, we still see the next recession as not imminent, not on the horizon.

Toby: So the recession is still hopefully distant, policy makers are being quite accommodating and being sensible when it comes to interest rates. That’s supporting markets picking things up a bit. Are you seeing any particular sectors either in the UK or globally that are of specific interest to you or perhaps more importantly things that you would be steering clear of?

Will: I think that we get back to that bond market story. When you talk about policy makers being sensible, you could argue that. I think probably from our perspective we would be quite surprised if this is the peak in interest rates, in base rates in the US for this economic cycle. We suspect that central bankers may have to continue raising interest rates there at some point again. That is part of the story that says the bond markets are a little bit unrealistic and that’s why we’re holding a little bit less than we usually would in that space.

Toby: Finally, before we wrap up, are you and the team looking at making any material changes to the portfolio or is it still a case of get invested, stay invested, stay diversified?

Will: It’s like your heard the message before Toby. Yes, very much so. I think the big point for us at the moment, as we always say on this forum, when you’re looking from a long-term investing perspective you don’t worry about recession, you don’t worry about Brexit or President Trump, his chances of re-election. All of those things are almost irrelevant. The two things you’re looking at is the valuation of capital markets or look at it the other way round: do I believe in the long-term future of innovation, do I believe that human kind is going to continue to invent new stuff and get better at using that new stuff, productivity? And do I believe that the price to access that ticket, the price of the ticket to access all of that innovation, is it fairly priced? Both of those we can answer “yes”, so today is a good day to enter a diversified portfolio.

Toby: Well nice to see you again and thanks for sharing what is yet another month of positive story. Hopefully we’ll have the same tune to sing again next month, who knows. And thank you very much for joining us, we hope to catch-up with you again next month.

Toby Cross, Head of Client Investment Solutions, talks to Will Hobbs, Chief Investment Officer, about the recent bounce in equities and the outlook for the US bond market.

The current landscape

The Federal Reserve’s recent u-turn over its expectations for further interest rate increases has provided markets with some solace. But we believe that the bond market’s outlook for growth and inflation is too meek, and that current yields are underestimating the likely pace and frequency of future Fed rate hikes. We still think that now is as good a time as any to invest in a diversified portfolio and stay invested. 

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