Commentary on November 2018
Festive Greetings From Charlwood’s
After October’s stock-market rout, November marked a period of consolidation with most equity markets ending slightly higher. The US and Japan rose by just over 2% (in sterling terms); Europe was flat and further Brexit worries sent UK shares marginally lower. After several months of relative under-performance emerging markets rallied by around 6%. Bonds showed small losses, but oil took the headlines with a collapse of more than 30% over the past two months.
The US Federal Reserve toned down its stance on interest rates; minutes from the last meeting showed that members remained in favour of a December hike in rates but were less certain of the path for rates in 2019 (previous expectations had centred on a further four 25bp hikes next year). Fed’ Chair, Jerome Powell, amended his October comments that interest rates were “some way below neutral,” now judging them to be, “just below the broad range of neutral”.
Europe was beset with one crisis after another. On the economic front, forward-looking surveys continued to suggest that the rate of growth was slowing with German data recording negative growth for the third quarter, though this had been expected and was attributed to several one-off factors. However, it was the political situation that caused more concern with leadership across the Union under threat. Germany’s Chancellor Merkel is no longer the leader of her party and it will be interesting to see whether she maintains her authority on the European stage. The Italians have conceded ground on their budget proposals, though this is far from resolved either domestically or in talks with the EU, and the French took to manning the barricades and calling for President Macron’s head. In Spain, for the first time since the death of Franco, a far-right party won seats in a regional election.
Theresa May agreed terms of surrender with the EU, but this met with disapproval from all sides back in the UK. For all the bluster, no credible alternative was offered, and this continued to take its toll on businesses, which showed further contraction in investment and confidence at its lowest since 2009. On the plus side, unemployment remained at 4.1% and wage growth at 3.2% exceeded the rate of inflation.
Positive returns have been difficult to achieve this year. There has been no outright collapse in prices but, to date, over 90% of asset classes have lost money; this year is on course to be the first in which every single asset class failed to keep pace with inflation.
The maturity of the current economic cycle, most evident in the US, is causing much speculation on the timing of the next recession, but with unemployment, inflation and interest rates at historically low levels this doesn’t look as imminent as investor behaviour would suggest. There is a well-argued case that the decade-long bull-market is over, supported by increasingly negative technical indicators. Equally, it can be said that the global economy remains in fine fettle and is merely returning to trend after a period of above-trend growth.
Global asset-markets have repeatedly lurched from optimism to pessimism in their interpretation of world events, often over-reacting in either direction. Prime examples have been the likely effects of President Trump’s on-off trade talks, and whether the US Federal Reserve’s anticipated pattern of rate hikes will kill off growth or lead to rampant inflation; neither have happened but market volatility has hit the highest levels for some time. The US stock-market has suffered two corrections of greater than 10% this year; the losses on other markets have been worse.
The undeniable over-riding factor is that monetary conditions are tightening. In the absence of central bank support, genuine price discovery is returning and, with opinion on the future direction of markets so divided, is leading to an increase in price volatility. This doesn’t make a bear market more certain, but it does mean that we need to be prepared for greater, and more frequent, price movements.
How are we currently positioned?
We remain overweight UK equities, which has detracted from performance with the Brexit uncertainty, but which we think offers better value than most other markets over the longer term.
During the recent weakness we added a bit more risk across the portfolios, focussing on value.
We remain underweight fixed interest, preferring equities, property and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.