Market Update – August 2019
A summary of our current economic and market views
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.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.