You will have seen a reduction in global stock markets of late back to where they were at the start of 2018 – why is this happening now?
Interest Rates
Rising Interest rates in the US is causing bond yields to rise which makes them more attractive for investors looking for income. Consequently, this has a dampening effect on Equities as they are not the only place to invest in, as it was when Bond and Cash yields were low. These alternative investments are traditionally less volatile and adds a measure of diversity to an investor’s portfolio and are now becoming more attractive.
Rising interest rates increase the ‘cost of borrowing’ for consumers and businesses. This reduces spending which influences a company’s profitability and the economy generally. This is quite ironic as rising interest rates is generally a sign an economy is growing. So, this could be a good sign longer term but via the short term the markets are curtailed via investor sentiment.
Trade Wars
Other issues affecting the markets at present are the continuing trade wars and President Trump looking to ‘Put America First’ at all costs. This is creating worries about the global growth outlook and has had a detrimental effect on Emerging Market economies during 2018.
Earnings Growth
These issues are not new and have been somewhat masked by the positive economic growth achieved in the US. Earnings drive up share process and because of Trump’s tax cuts the ‘earnings per share’ has been rising. It is quite likely that the earning growth in the US is not sustainable and there could be monetary issues in the next 2/3 years and as investors look forward into 2019 they are becoming more pessimistic.
UK and Brexit
In the UK it is looking more and more likely that the Brexit negotiations will conclude with a relatively “soft” Brexit. But, as current media headlines show, there are still several compromises that need to be made on both sides to seal the deal.
If the outcome is a relatively soft Brexit, there are likely to be significant implications for the UK economy and markets going into 2019 / 2020. It is likely that sterling will rise, which would bring down UK inflation and help lift consumer and business spending.
We may then see a different expectation for UK interest rates. Before the referendum in 2016, the Bank of England (BoE) was expected to be the first central bank to start increasing interest rates back to a more “normal” position. This was due to unemployment being low and the economic recovery well underway.
Post Brexit, unemployment is now lower and therefore it would seem likely that the BoE would need to raise interest rates at a faster pace than the 0.25% per year that is currently priced.
Conclusion
The key with stock market volatility is not to over-react. Share prices will fall and rise and it’s important not to be ‘out of the market’ at the wrong time as this can be costly to your overall capital values.
However, we believe investors should remain focused on the medium to long term, investing over ‘time’, rather than trying to ‘time the market’. Active management remains important and generally volatility can be partially mitigated by diversifying investments across a broad range of asset classes that include equities, commercial property, fixed interest securities (bonds) and cash to spread risk even further. We will always look to ensure that you have investment portfolios that reflect your requirements, tailoring them to your attitude to risk and capacity for loss, whilst considering what the impact the current stage in the economic cycle has on your exposure to various assets.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]
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