Market Update – August 2019
A summary of our current economic and market views
01 Aug 2019
Stock and bond markets underwhelmed by Fed’s first rate cut since 2008
The US Federal Reserve cut interest rates by a quarter of a percentage point to 2.25% at the end of July. Equities and short-dated bonds fell on the day, while the trade-weighted dollar index rose to its highest level in two years. The reaction came in response to Fed Chairman Jerome Powell’s insistence that this did not mark the start of an interest rate cutting cycle. Investors have been expecting further cuts this year. Increased uncertainty around the path of US interest rates in the second half of the year will likely lead to higher volatility for all asset classes. We are well prepared for this.
European Central Bank increasingly supportive
With Eurozone activity under continued pressure, particularly in manufacturing, the ECB has hinted that it will also take measures to support growth. However, we question whether even lower interest rates would have much impact on the Eurozone economy. A commitment by European governments to higher spending would do more to change the region’s growth trajectory, but political support for this is far from certain.
Boris Johnson’s premiership brings renewed volatility to UK markets
Sterling has fallen to its lowest level since the Brexit referendum as Johnson has reiterated his commitment to leave the EU by October 31, with or without a deal. Unfortunately we do not believe that sterling’s weakness will be of meaningful benefit to the UK economy. Meanwhile, UK equity market performance has been characterized by high dispersion, with sectors responding very differently to political developments. Over time, this will create opportunities for stock pickers to add value.
Overall, our equity exposure remains at a level that is broadly in-line with our long-term target. Valuations are higher than long-term averages but not at extreme levels. Inflation is currently subdued and periods of low inflation have historically been associated with higher valuation levels. We remain underweight bonds as the yields on offer are below current inflation.
This results in a higher allocation to alternative investments and cash. The former offers valuable diversification benefits. The latter will allow us to take advantage of investment opportunities that may arise as a result of ongoing market volatility.