Market update - March 2018

The charities team shares our current views on the markets.


Return of volatility
February saw the return of market volatility, with the FTSE 100 moving down from its high of 7,793 in mid-January to a low of 7,073 in early February. Although the speed and scale of the decline may have felt startling, this return of volatility should not be a surprise. In fact, it is perfectly normal to expect intra year pull backs of this size. In 24 out of the last 32 calendar years we have seen a fall in the UK equity market of greater than 10% within the year; in only 9 of those 24 years did the market generate a negative return for the full year. Volatility provides active investors with opportunities to add value and we believe the recent pull back has been a helpful ‘reset’ for markets.

Economic news remains positive
Leading economic indicators have continued to reflect strength and synchronisation in global economic growth. The Global Composite Purchasing Manager’s Index (PMI), a combined activity index of manufacturing and services activity, climbed to its highest level in over three years. Significantly, the measure saw both the advanced and emerging markets economies components increase. This, combined with the announcement of further fiscal expansion in the US, has led us to upgrade our global growth forecast for 2018 to 3.5%. However, stronger growth is likely to fuel higher inflation, particularly in the US where cyclical pressures have built. We now expect interest rates in the US to rise four times this year, offering support to the dollar. We also expect a rate rise in the UK this year, despite the fact that the UK economy has gone from being one of the strongest economies in the G7 to the weakest. Higher inflation continues to squeeze the living standards of UK households, while Brexit uncertainty is weighing on business confidence.

Bond markets vulnerable
The return of inflation and rising interest rates is likely to increase yields even further. 10 year gilt yields have already moved up from under 1% in the summer last year, to 1.5% today; equating to a price fall of 5%. We believe bond markets are vulnerable and remain underweight. Despite full valuations and upbeat market expectations, equities should continue to benefit from economic strength and earnings growth. However, companies that fail to meet earnings expectations are being harshly punished, leading to greater dispersion in individual stock performance. This supports the need for fundamental analysis and active management. Alternatives are useful diversifiers and our exposure to absolute return held up well in the recent market falls. We are focused on building diversified portfolios for the future. Having enjoyed the long period of upward momentum in equity and bond markets, we expect the coming months to provide more challenges, and consequently opportunities for long term investors.


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. 

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James Brennan

James Brennan

Portfolio Director