Market update - November 2018

A summary of our current economic and market views


October market correction
October was an unsettling month for global equity markets, with the UK and US markets falling by over 5% and Asian and Emerging Market equities falling by 7%. Concerns that corporate margins have peaked has contributed to the change in market direction along with rising bond yields, anxiety over ongoing trade tensions, Brexit, Italian debt and the upcoming US mid term elections.

Earnings continue to beat expectations, but momentum is weakening
Whilst market sentiment has weakened, it is important to consider whether the earnings outlook has deteriorated enough for us to change our level of equity exposure within portfolios. Of the 146 companies reporting earnings so far in the US, 86% have beaten earning expectations and 61% have exceeded sales expectations. Despite this, earnings momentum is clearly weakening, with corporate guidance for future earnings growth being lower than previous reporting cycles. Companies cite a wide range of factors from increasing costs of labour, energy and raw materials to softer demand.

Trade tensions cast a shadow
The trade disputes between the US and China pose a risk which is harder to quantify. The dispute has the potential to threaten global growth and increase inflation which could impact corporate earnings through higher costs and lower margins. For example, a 25% tariff on all imports from China has the potential to reduce US earnings growth for 2019 from the current forecast level of 8% to near zero. This is not our central view, but it highlights the potential impact.

Portfolio implications
Overall whilst we are cognisant of the increasing threats to global growth, we are happy to maintain our current equity positioning across portfolios. Given recent price movements, valuations of equity markets now look more attractive. Diversification into alternative investments helps to reduce risk, and we hold property, infrastructure, commodities and absolute return where appropriate. We retain our underweight position to bonds, and any cash held in portfolios provides us with liquidity to take advantage of ongoing 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. 

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James Brennan

James Brennan

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