As we’ve previously stated, 2018 has seen a return to market volatility throughout.
The last few days, in particular, have seen significant daily sell-off’s in US, Europe, UK and emerging economies.
Here we'll try to briefly set out why and what our thoughts are:
The US has seen a gradual tightening of monetary policy (e.g. raising of interest rates) making markets nervous about the end of the current economic cycle approaching and thus valuations of share prices being at the high end.
We've also then seen the yield curve (increase in interest) on shorter-term treasuries (cash equivalent return) increasing and breaching the 3% mark. This has added to the above uncertainty along with the ongoing trade wars with China to cause a broad sell-off in US equities (shares).
Here we have the continuation the Brexit story or saga as it may be better termed, coupled with the apparent lack of compliance from the Italian government to adhere to EU rules, increasing the worry of Italian loan defaults.
Emerging economies always carry a significantly higher level of volatility than developed markets and this is consistent with the risk/reward dynamic of the asset class.
The recent sell-off may be more to do with the rising US Dollar, as most loans to emerging markets are from the US or denominated in USD, thus the potential rising cost of borrowing for potentially highly geared (high borrowing) companies which would hit profits, cash reserves and thus share prices.
Talks of a Brexit deal and some significant dates in the next month or two, such as EU summits and an earlier budget, has lead to a stronger pound and thus a fall in UK Equities (FTSE 100) as most of the constituents of UK market indices export their product, making it more expensive to the ‘buying markets’ overseas.
Conclusions & View
We make no apologies here for banging the ‘diversified portfolio’ and ‘long-term view’ drums. We're entering an important period with summits in Europe, US earnings season and midterm elections, all of which seem to have potentially positive indicators.
We continue to carry a fairly defensive position in our portfolios and we are perfectly correlated to our risk parameters and volatility levels so the portfolios remain suitable and well positioned.
That said, we already have months of research and planning into the next wave of changes we may make to the portfolios to position them for what we see as the next stage of the economic cycle and we will, of course, make changes & adjustments to manage risk as the main priority to preserve capital.
In summary, our portfolios are designed with diversification to manage volatility like that seen in recent times and are built for the long term so it's worth refreshing and retaining those thoughts during this time.