Please find below our weekly Investment Snapshot for the week ending 23nd February 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
On Wednesday, the minutes from the Federal Reserve January Policy Meeting, held on January 31st, were released. The meeting, the last with Janet Yellen as it’s chair, concluded that economic expansion in the US is set to gain momentum, reinforcing the argument for further increases on short-term interest rates. According to many major US investors an interest rate increase in March is essentially a done deal, citing improving economic prospects, the impact of US tax cuts and rising inflation as the main reasons for this.
Volatility returned to the global markets following on from the news, but initially in a more positive way as the S&P 500 finished at 1.2% up on the same day, the Hang Seng was up 1.8% and the FTSE 100 finished up half a per cent. Furthermore, gold went down more than $5 to a 1-week low of $1,324 after the dollar rebounded; it was up 0.4% at a 4-session high of 90.05 later in the day, leaving the greenback more than 2% up from a 3-year intraday low struck at the end of the last week.
However, despite the gains made on Wednesday, the return of inflation gives the Fed even more scope to remove the safety net of ultra-low interest rates from ‘big business’ with exaggerated stock market valuations. As investors began to sell off on Thursday, stocks started to tumble on Wall Street and markets around the world followed suit. At the time of writing, the FTSE 100 and the EuroStoxx are down 0.9%, the S&P 500 is down 0.55%, and the Hang Seng index is down 1.48% – a massive fall from its 1.8% gain the day before. Overall, the unpredictability shown in global markets this week seems to point towards a new conclusion: volatility has returned, and it doesn’t look like it’s going to go anywhere any time soon.
Gary’s market comments in conjunction with our investment partners
The Strategic Bond funds that LGT hold in portfolios have performed well over the last year – despite the challenging background environment – with Threadneedle Credit Opportunities and Blackrock FIGO producing positive performance over the period. Across all the model portfolios and Volare funds, Vestra use absolute return funds for risk management purposes. These funds have had a strong start to 2018 despite the recent period of market stress and volatility. Old Mutual GEARs, JPM Global Macro Opportunities, Artemis US Absolute Return and IP Global Targeted Income have all produced positive returns with JPM Global Macro Opportunities up just under 5% since the start of the year.
7IM have added positions in 5-year US Treasuries. These offer tail risk protection against a potential downturn in stock markets given the current run is the third longest in US equity market history. While the length of the cycle is not, itself, a concern, there is the view that the cycle could run out of legs given the markets typically dip 6-12 months before the economy runs ‘out of steam’. The US Treasuries also offer a good yield and low duration.
Sources: LGT Vestra and 7IM