Market update - April 2018
The charities team shares our current views on the markets.
Market volatility returns
Trade wars, Brexit and rising interest rates - it’s been a busy start to 2018. How these events play out in the long term is anyone’s guess, but for now investors have passed judgment – they’ve run for the hills. The FTSE 100 is down 7% since the start of the year, the poorest performing index among the 23 developed equity markets year to date, with nearly all markets falling. Though the threat of protectionism is one reason for the soggy performance of equities so far this year, rising US and UK yields are also a factor as equity valuations appear relatively less compelling.
Benign economic environment
Our cyclical indicators still point to a benign global economic environment. The US economic expansion, which began in July 2009, is set to become the second longest on record in May. But how much longer can it last? The good news is that the US economy does not suffer from the imbalances in debt seen in previous cycles. But an increase in inflation poses the greatest threat to economic growth. Barring external shocks, such as a trade war, the most likely time for the current US expansion to end would be when the economy feels the full impact of higher interest rates alongside reductions in tax cuts and spending increases. This is most likely in 2020. Positive for now, but less convenient for President Trump, who faces the risk of fighting for re-election in the face of slowing growth.
Three strategies for a mature bull market
In the aftermath of a bear market, investors should focus on capturing as much of the upside as possible as valuations bounce back. However, we are now in a mature bull market where valuations are more stretched and chasing returns would be foolhardy. We are therefore focused on finding value and avoiding overbought stocks. Secondly, we diversify, spreading risk across a range of return sources. This allows us to remain invested - important whilst cash rates are so low. Finally we search out the indicators that would trigger a change in our strategy and plan our next steps.
Implications for portfolios
Currently we remain invested in equities, which should be supported by robust earnings, solid economic growth and moderate inflation. Within equities, we have some exposure to value stocks as they have lagged the rest of the market and exhibit lower sensitivity to interest rates. Despite the pick up in yields bonds remain vulnerable to inflation and we continue to be underweight. Alternative investments are important diversifiers in portfolios; to provide ballast in more volatile market conditions.
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.