Investment Review & Outlook: Time to Buckle Up

by Graeme Bibby Chief Investment Officer Graeme has over 20 years’ experience in investment management. He has extensive experience in portfolio management and asset consulting, with expertise across macroeconomic analysis, strategic asset allocation, investment policy, risk management and implementation of multi asset class portfolios. Contact Graeme

Been on a long haul flight, fallen asleep and then woken up by some sudden turbulence?

Then things settle down and you are about to drift off to sleep again. But wait – did you remember to buckle up your seat belt? It’s not working any more. What to do? You nervously lie awake, and then feel some more, smaller bumps.

We are kind of in this situation now in investment markets.

Remembering that when turbulence appears on a flight, it often means that storm clouds are near. Will the pilot be skilful enough to avoid a patch of stormy weather, or is there a solid bank of storm clouds in between us and our destination that we have no option but to fly through.

Enough with the analogies! What’s really going on?

Let’s introduce you to the summary of our Quarterly Review of Q2 2018 and Outlook for the next 3-12 months. You will be able to link to a full version of the Outlook at the end of this article.

The first half of 2018 has seen a return of volatility in markets. Economies across the globe are witnessing diverging economic growth. We see a strong US economy contrasting with slowing economies in Europe, China and some emerging markets. Interest rates have hit higher levels, peaking in the short term as growth concerns begin to outweigh the prospect of strengthening inflation. The threat of trade wars, the North Korean – US summit nuclear deal, rising immigration controls, a populist government elected in Italy all battled for headlines and impacted markets in the short term. We expect that rising uncertainties and peaking growth and earnings to be priced in by markets in the next quarter or two.

Themes for 2018
  1. Monetary (central bank) stimulus is receding, while fiscal (government budget) stimulus is rising
  2. Interest rates rise as inflation expectations rise
  3. Market volatility rising sustainably from low levels
  4. Global growth diverging across countries
Investment Markets

Markets have been impacted by emerging inflation pressures and tightening financial conditions while economic growth is showing clear signs of rolling over in many markets, especially Europe, China and some emerging markets. The more buoyant economic conditions in the US combined with rising Federal Reserve cash rates have been very supportive of the US Dollar, which has rallied since April.

Global equity markets have been mixed with some strong markets in the US, particularly the Nasdaq outperforming the S&P 500. We are expecting a strong US company reporting season to follow on the momentum, but note that cost pressures, particularly in wages, are rising.

Government bonds, mainly in the US, have risen with selective markets elsewhere also responding to economic or political pressures with higher bond yields.

Credit has remained sought after for yield, keeping credit spreads low, contrasting with a drift higher in corporate leverage over the last few years.

Volatility has been elevated since the equity correction in February and subsequent rebound, only recently settling back into a more benign lower volatility level. We believe volatility will rise again and average higher levels this year than last.

While our tactical views are unchanged from last quarter, we are very alert to changing this at short notice and will inform clients when this does change.

Click to read our detailed Investment Review for Q2 2018.

Mutual Trust Pty Ltd ACN 004 285 330 (AFSL 234590). Liability limited by a scheme approved under Professional Standards Legislation. For participating members (other than for the acts or omissions of Australian Financial Services Licensees). This information is general in nature and subject to change. It does not constitute tax, legal or financialadvice. We recommend you seek advice specific to your circumstances before taking any action. Copyright © 2014 Mutual Trust Pty Ltd.
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