Please find below our Market Update for the week ending 12th October 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Blue Sky Comment
Following the recent activity across markets, this communication is somewhat longer than normal and slightly later as we were waiting for pertinent updates from our investment partners.
We should be used to shifts in sentiment since 2009, but last year’s benign conditions, across most markets, proved to be the calm before the storm, as warned. The FTSE 100, a global index, has now fallen by 11.47% from its height in May, having recovered from a similar loss since March. We have had two major swings in sentiment with this index in 2018 and previously the FTSE 100 fell by just under 12%. This suggests an attractive entry point is occurring for new money into the market. We appreciate that news flow around Brexit is a concern, but it’s important to look at the global picture. Here trade wars are causing concern along with aggressive central bank policy in the US. The stronger dollar has had a marked effect on some markets, which are now officially in ‘bear’ territory.
We have warned of volatility due to rising interest rates in the US, although the Fed has been more aggressive, than most expected. As the cycle matures, such movements are typical and to be expected. This is why just placing money into indices is dangerous. A more diversified approach is desirable, with an emphasis on moving money into certain sectors and asset classes in accordance with economic and political conditions. This serves to help protect portfolios from extreme losses.
Below is an update from LGT Vestra and 7IM, our strategic investment partners.
Have a good weekend. Unfortunately, this is what markets do from time to time. A good entry point though for new money.
Chair of Blue Sky’s investment committee.
Blue Sky’s market comments in conjunction with our investment partners
A note below from LGT Vestra’s CIO Jonathan Marriott on the recent market moves. 11th October
After over 3% falls in US stocks last night Asian market are down about 4% as I write this morning. The falls in the US market were led by tech stock but no sectors were entirely immune. The oil price fell sharply and is now 5% below its peak. The European and UK markets are opening down about 1.5% after a similar fall yesterday. The main driver of concern appears to be higher interest rates and bond yields in the US. US bonds had mostly been steady all day, but rallied towards the close.
Clients will undoubtedly be unsettled by the headlines following these moves. At the moment, the US futures are down about another half percent. The sell-off may not be finished but I do not see this as a start of another bear market. This afternoon we will get the latest US consumer price inflation which may have an impact on the bond market which could knock on to equity markets. Tomorrow the banks kick off the US reporting season when we expect some positive numbers to come out.
The US market had out performed so far this year and a correction is healthy. The US economy is robust and company earnings and sales in the reporting season are likely to support this view. The UK market seems to have been more insulated, only down circa 1%.
The correction in markets may not be over today but from my point of view an opportunity to buy the market is developing.
A note below from 7IM’s new CIO, Martin Surguy on the recent market moves …12th October.
- The catalyst for this week’s events comes from the United States. Specifically, the looming trade war combined with rising bond yields and interest rates.
- Our investment strategy is rooted in our long-term belief in well diversified multi-asset portfolios and avoiding emotional responses to short term developments.
- The fundamentals do not suggest that a wholesale change in strategy is appropriate – growth is firm, liquidity conditions are supportive, while valuations are not overly stretched relative to earnings prospects.
- On a tactical basis, our strategies are fully weighted in equities, relative to longer term targets, and skewed toward a more defensive value-oriented style. Fixed income markets are not preferred.
Equity valuations are certainly not cheap but nor are they worryingly expensive, when set against forward earnings prospects. There are pockets of extreme overvaluation, notably in tech, which is being unwound to some extent at present and where our portfolios are not significantly exposed. However, equity valuations are not far out of line with long term averages. On the fixed income side, we continue to believe that most sovereign markets are unambiguously expensive, while credit offers only modest prospects from here.
Investor sentiment at present is generally cautious, with recent market developments reducing the complacency of the last few months.
In conclusion then, our assessment of the fundamentals does not reveal a particularly worrisome picture – but we remain vigilant for signs of deterioration.
How are we positioned?
Our investment positioning and strategy is derived from a fundamental belief in diversification, as the key to long term investment success and the delivery of attractive inflation-adjusted returns. Multi-asset strategies are well diversified through asset class, geographical region, sector, investment style and underlying holding. Active managers are blended with passive approaches and traditional asset classes are complemented by alternative ones.
On a tactical basis, our strategies are fully weighted in equities relative to longer term targets, but tend to be skewed toward a more defensive value-oriented style. We have been underweight in the expensive technology space, which has been beneficial during the current episode, but hurt as the sector has soared over the last few years. We are not minded to change this view and believe that the current rotation from growth sectors to our preferred value areas should continue.
Elsewhere, our Emerging Market positions in both debt and equity have not been helpful this year, given the prospect of a trade war, a stronger dollar and concerns over Chinese growth. We remain confident in the prospects here, driven by valuation support, stimulus in China and the likely feel-good factor associated with a US-China trade deal, which we believe will come.
Our fixed income positioning has remained unaltered throughout the year, with very limited exposure to sovereign markets. We are concerned about the impact on capital values as yields normalise from historically low levels. Credit markets, too, offer only modest prospects, as credit spreads are low with little scope to fall further.
Our alternative asset holdings continue to be managed as a counterbalance or buffer to riskier areas of the portfolio and have an important role to play in diversifying our multi-asset class strategies.
What are the prospects from here?
We believe that the investment environment has not been altered by the recent drop in equity markets and rising volatility. We have consistently emphasised that volatility is to be expected as markets digest higher rates and rising inflation. The fundamentals do not suggest that a wholesale change in strategy is appropriate, and there’s little sign of recession. We expect that our strategies will deliver attractive inflation-adjusted returns from here, supported by a strong corporate sector and solid, but moderating, economic growth.
Sources: LGT Vestra and 7IM