Since the 1st October, the main UK and European stock-markets have fallen by 6% (to the 16th October and in sterling terms), the US dropped 5% and Asian and emerging markets added a further 7-9% to recent losses; fixed interest bonds fell by 0.25-0.5%. Although our holdings within absolute return funds proved disappointing, our other diversifiers, property and gold, rose by 0.1% and 2% respectively.
Stepping back from the sharp fall in October, emerging markets, the UK and Europe have been trending lower since the beginning of August; not in a panicky way and all with valid reasons- the rising US dollar, a potential trade war, Brexit and a naughty Italian budget being the main concerns.
In early October, Chair of the US Federal Reserve Bank, Jerome Powell, warned that interest rates might need to be raised further than investors had expected, in order to prevent inflation from over-heating (subsequent minutes from the last meeting showed that a majority of members shared this view). The US 10-year bond yield ratcheted up to 3.25%, the highest in seven years; this was something that hadn’t been factored into market valuations, and so began the sell-off.
Our view is that economic, geo-political and valuation worries are not new; they were around during the emphatic bull market and will continue in one form or another. The major sea-change is that the global economy has switched from one of monetary stimulus (with central banks seen as ongoing buyers of assets) to monetary tightening; the lack of ongoing central bank support won’t preclude sharp rallies, but it will make the future direction of investment markets far less certain.
We’re not big fans of media headlines that focus solely on the major stock-market indices; our portfolios don’t resemble these indices and our recent falls were far less than the headline minus 6% splashed across the press. With falls of the magnitude witnessed over the past couple of months, losses across the portfolios were unavoidable, but we can report that all model portfolios have fallen by less than their equivalent benchmarks since both the 1st August and 1st October. Since 1st August our portfolios have fallen by around 1.7% on the low-risk model to 4% on our highest-risk model. The income and medium-risk models were down around 2.5%.
We don’t look to add value by trying to trade the markets; few are consistently successful in timing both the sale and re-entry. Investment markets tend to remain bullish far longer than would appear rational, so we have been reluctant to reduce our overall exposure too aggressively. Rather, we have opted to mitigate the risk by running our portfolios with a bit less risk than their benchmarks, and by avoiding inflated areas such as technology and high-priced growth stocks, owning more out of favour markets such as Japan and the UK, while gradually increasing exposure to out of favour value stocks.
In driving parlance, we’re trying to follow the markets higher but with our foot lightly on the brake so that we can avoid crashing!