There has been a sense of déjà vu pervading markets during the month. If one compiled an inventory of key risks that radiate from economic analysts’ reports, the list would look remarkably like it did in September 2018.
However, there is an intensifying assertion that the longest continual economic expansion in US history (123 months) may finally be faltering. It should be recognised that while that expansion is remarkable in terms of time, it isn’t in terms of speed; cumulative GDP growth is around 25%, while job growth was 12% despite historic low unemployment. The previous record period that started in 1991 saw GDP growth over 42%, with available jobs growing by 17%. That period ended and coincided with the dot. com collapse, and a recession, which lasted almost 2 years. It’s a repeat of this sequence of expansion and recession that is now concerning analysts. It was not unexpected therefore when the US Federal Reserve cut interest rates in September. The S&P 500 rose by 2%, but a UK investor saw around a 0.5% return due to sterling’s rebound.
An economic slowdown has been evident elsewhere in the world for some time. The European Central Bank (ECB) also cut interest rates during the month - making rates even more negative (if that makes sense) - and quantitative easing was reintroduced, with a promise to maintain it until its inflation target of 2% is met. In September, that inflation rate had declined to less than 1%. In spite of Germany appearing to be on the brink of recession, the DAX 30 index still managed to rise almost 5% in Euro terms during the month; the fact that the ECB is committed to being the asset-buyer of last resort, and the belief that individual countries’ fiscal policies are likely to support growth, has helped European markets to continue their advance.
The US trade wars continue, with another round of tariffs due to bite in October and beyond, particularly affecting UK and European agricultural and related goods. China may rely on the fact that its economic growth, though slowing, is still over 4% per annum, while higher tariffs increase prices for American buyers. With evidence of slowing US growth and an impeachment-beleaguered President Trump starting his re-election campaign, there may be little motivation for China to be conciliatory and lose ‘face’.
Against this background, well-diversified portfolios continue to perform the roles they’re designed for, e.g. the Avellemy Risk profile 5 portfolio rose almost 1% during September, which has culminated in a comforting 14% year-to-date - and without needing to take excessive risk.
While the news and noise might ebb and flow, the daily moves are ironed out and good companies providing quality products and services will prosper, as will the portfolios that invest in them.
Ascot Lloyd Investment Committee
Cash: The physical value of cash should never go down and a published rate of interest is added to the capital at set intermittent periods. Inflation could run higher than the interest received, therefore the value of the capital held makes a loss in real terms. Charges for investment products such as pensions may be higher than the interest received and therefore eroding capital.
Bonds: This is effectively a loan to a company or government and an interest payment is paid from the borrower to the lender during the life of the bond. At the end of the term, all the original money is repaid to the lender. A default means that a company or government is unable to meet interest payments or repay the initial investment amount at the end of the securities life.
Property: Returns are driven by the property value and rental income. As property is a specialist sector it can be volatile in adverse market conditions, there could be delays in realising the
investment. Property valuation is a matter of judgement by an independent Valuer, therefore it is generally a matter of opinion rather than fact.
Equities: Also known as Stocks and Shares. Each investor participates in a share of the ownership in a company. The risks are that equities can fall if a company fails to perform or the sector in which it operates underperforms due to lowering demand, policy change or recession. If a company folds, the investor may not receive their money back.
Hedging: A method of reducing unnecessary or unintended risk, similar to an insurance policy.