As the news remains dominated by the possibility of a trade war, investors have remained nervous and equity markets unsettled. The perception that tensions are easing saw markets rise, renewed fears over an escalation saw pull backs. For now, there is little to suggest that this pattern will change in the short term. Volatility is, quite clearly, back.
Last week, we briefly discussed the refrain of the optimists that “all is good while the economy remains strong”. Increasingly, we are reading arguments that economic strength will translate into earnings growth that will make those markets that currently look expensive more reasonably valued. The pull back seen this is year is largely regarded as a correction and highlighted as being only one of many seen during this bull market. Even those who do believe that we are late in the cycle are arguing that equity markets tend to do well in the last year or so of a bull market and so we should hang on in there for the final ‘blow off’.
Well, we don’t want to be bolshie, but this does sound a little too much like conformation bias to us. We have been very clear that we don’t expect markets to come tumbling down around our ears in the immediate future. However, we do think that we are nearer the end of the bull market than the beginning. Will we see equities move higher from here? We think so, yes. Will they move higher then their peaks in January? It would be nice to think so. But the truth is that it would be a guess to say by how much and when.
What we do expect is that returns will be relatively low from equities, whilst volatility is likely to remain higher. It is for these reasons, therefore, that we are continuing our slightly more cautious posture. We are progressively rebalancing towards a more neutral position and are using good days to top slice significant overweights. The proceeds of these moves are expected to be redeployed into lower risk assets. The result will be an overall de-risking of portfolios in the short term.
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