Our Investment Perspective

So far, 2018 has been a tough time for investors. And particularly tough for UK investors who have large exposure to UK equities which have been amongst the worst performing. The big question is obvious – where do things go from here? If only there was a simple answer. But, sadly, there isn’t.

What a lovely trade war

Let’s look at the overall background first. With a few exceptions, most economists are telling us that the global economy is solid and that it is still growing. That’s great and reassuring. But there are other factors at play. The big noise at the moment is about whether we see a global trade war or the US can strike a deal with China. It is all over the news so we won’t bore you with the details. In a nutshell, the possibility of US tariffs on some USD50 billion of imports from China from the beginning of May raised the prospect of retaliation. Equity markets had a torrid time, seeing sharp falls in every region.

What is lurking in the background

Lurking in the background are, of course, tightening US monetary policy, worries of the rate at which it will tighten if inflation picks up, and concerns for equity valuations. It’s not just US policy that is going to tighten either. The UK will and the Euro area will move in that direction too. Chuck into the mix stories about “it’s been such a long bull market”, the reality that we are later on in the cycle and a few items of weaker than expected macro data and it’s been a good mix to rattle investors’ confidence. Headlines about poisonings and diplomatic expulsions don’t help – even if they have very little real economic impact. At least the stories about North Korea and nuclear missiles have morphed into “let’s all be mates” – for now at least.

Prudence not real nervousness

None of the above, though, answers the question. Where do things go from here? Well, we think they should get better. A bit better at least. An equity pull back was expected and didn’t surprise us. But it may now have gone too far as these things so often do. We do still see global growth continuing, and we still don’t think this is the beginning of the next bear market. But we do expect lower returns and higher risks – for equity and for bond investors. So we will be looking at our portfolios where we have had overweights in equities and use any rally as an opportunity to rebalance with a view to adopting a more neutral stance. We regard this as prudent and not as a signal of any real nervousness.

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