November strategy update

  • Strategy update
  • 5 minute read

October saw the second significant decline in markets this year, with high levels of volatility. We believe two factors were at play:

  1. Interest rates have risen in recent months. For long duration assets, such as shares, this means that valuations (the price you pay for shares) need to adjust. This has now largely happened, with valuations for most share markets trading below long term averages.
  2. Outside the US, there has been some slowing in growth momentum, with concerns that trade tensions will cause activity to slow further. However, overall global GDP growth is still solid and particularly strong in the US and it is notable that China is adding some stimulus to counteract recent slowdown in its economy as well, which should take hold as we enter 2019.
  • Overall, company earnings have been strong, particularly in the US (where third quarter will come in with a 26% increase), although there has been more mixed guidance than in the past. Companies across a range of sectors have reported concerns about the negative impact of trade tensions on forward earnings. Some technology companies (which are still up strongly for the year) have indicated that future profits or margins may see some weakness. However, on the whole, earnings have either met or beaten expectations.
  • We recognise that a tighter liquidity environment and more moderate outlook for growth, coupled with ongoing political risk in the form of trade friction especially, could cause ongoing market volatility. As active managers, we aim to use the market volatility to our advantage.
  • Behind the scenes we continue to focus on quality companies with strong cash flows trading at attractive valuations. These companies typically prove more resilient in times of market stress, and stock selection continues to be additive to performance this year.
  • Short-term market conditions can put emotions to the test, but having a well-diversified portfolio across asset classes, sectors and geographies helps ensure that some things benefit from market volatility while other investments may be affected.
  • In the current economic climate, we still believe that shares can continue to outperform bonds, although we expect more modest returns and higher volatility than 2017. Moreover, security selection – being in the right companies delivering strong earnings – will continue to be a key driver of performance.
  • At a regional equity level, we favour the US, Europe, Japan, and select emerging markets, particularly in Asia. We remain underweight the UK, where uncertainty remains high, though we think a Brexit deal may be in the offing which would be a positive for this market. In fixed income, high quality, short duration assets are at the core of our strategy.
  • As ever, we remain well-diversified across asset classes, regions and sectors, and we continue to maintain a small allocation to alternatives for diversification. We continue to seek out new opportunities in the alternatives space, where we look for a source of uncorrelated return. We also hold some gold – as a safe-haven asset, which should provide some protection if political sentiment deteriorates.

 

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