Please find below our weekly Investment Snapshot for the week ending 11th May 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
The UK Monetary Policy Committee voted on Thursday 7-2 to hold interest rates at 0.5%, instead of raising them by the proposed 0.25%, and acknowledged an economic ‘soft patch’ as the reason for the decision. Because inflation has fallen faster than the Bank of England expected when it last published forecasts in February, the Committee stated that it can afford to keep its options open. Just a month ago a rate rise in May seemed inevitable, but positive market expectations all but evaporated last month through the release of weakened economic data. After this announcement, doubts are growing over the possibility of another Bank of England rate rise at all this year. Richard Carter, head of fixed-interest research at Quilter Cheviot, said it ‘is still possible’ for interest rates to rise again in 2018, but said ‘it might have to require an end to the current division and indecision at the heart of the UK Government over it’s Brexit strategy’. The pound fell on the news and is now down 5% from it’s 2018 high of $1.4376 in mid-April to below $1.35, although it stands at $1.3516 at the time of writing.
Oil Prices rose to their highest level since November 2014 at $77.52 in the aftermath of President Donald Trump’s decision to pull the US out of the Iran nuclear deal and re-impose sanctions on the country, despite pleas from other members of the deal to stay involved in the agreement as to not escalate tensions in the Middle East. The gains for oil stocks has helped push the main US equity indexes higher, with the S&P 500 having grown just under 8% over the last 30 days, although investors have sounded caution as they highlight the much wider potential impact on Donald Trump’s actions i.e. geopolitical risk in the Middle East resulting in even higher oil prices. Geopolitical risk will be a primary source of uncertainty in the future and the higher chance of military conflict in the Middle East region is a genuine concern for investors.
Rising oil prices causes so much concern because of the drag it causes on economies. Virtually every industry uses oil and therefore if oil prices go up, costs will increase for firms and they will raise prices to balance out their losses. This is called cost-push inflation, which will eventually lead to rising interest rates in an attempt to slow down the rate of economic growth. Some economists have predicted that the price of Brent Crude Oil, the international benchmark for the commodity, will average out around $75 per barrel in 2018, and that prices risk rising above $100 per barrel in 2019 for the first time since September 2014. For some context, when a barrel of Brent Crude oil last cost above $100, it created the worst crash in a generation that wrecked oil drillers and countries reliant on its export.
Gary’s market comments in conjunction with our investment partners
During periods of heightened financial market volatility and increased levels of uncertainty, it can be tempting to try and time the market by selling assets and then buy back into the market at a later stage. For example, in the run up to the Brexit vote many investors decided to sell down their portfolios to 100% cash. Although we saw an initial 3% dip, the FTSE 100 then rose by circa 20% leaving investors struggling to know when to buy back into the rising market. Missing those crucial 55 days following Brexit would have nearly halved your returns over the next 23 months (giving a return of just 17% vs 29%). We can learn three key lessons from this:
1) Political events (such as Brexit) often don’t have as big an impact on financial markets as anticipated.
2) Even if you are able to guess the correct outcome of a political event, the market doesn’t always react as you had predicted it would beforehand.
3) Finally, timing the market is virtually impossible, even for the most experienced investors.
Aside from the slow GDP growth rate for Q1, the UK also saw worse than expected factory orders while consumer credit demand came in at just £300m in March –the smallest increase since November 2012 and well down on the monthly average for the latest six months of £1.5bn. The increased holdings in the US Dollar bought in March – representing 5% of the value of the portfolio when we use the Balanced fund as an example –helped support portfolios.
Sources: LGT Vestra and 7IM