Investment Outlook – Third Quarter of 2018

The equity market fell sharply in October, almost revisiting the lows seen in March. Although the FTSE reached an all-time high in May, the index has since pulled back by 10%. This once again raises the question of whether the long bull market is nearing an end. Therefore, it makes sense to take a step back and attempt to look through the current noise and consider the big picture.

The pullback seems to have been driven mainly by escalating international trade tensions combined with threats of higher interest rates (suggested by rising bond yields). These factors in themselves would not ordinarily be sufficient to suggest an impending recession. The global economy is still growing healthily, with the US showing no sign of slowdown. US consumers are upbeat, encouraged by record levels of employment and upward pressure on wages. The recent news that Amazon have increased their minimum wage to $15 per hour is testament to this. American corporations, already benefitting from tax cuts, are likely to increase capital expenditure to boost productivity. In terms of the US economy, these factors are more likely to lead to an overheat, rather than a slow down.

Therefore we remain cautiously optimistic. However, volatility is here to stay as global investors continue to face further international trade concerns, the prospect of rising interest rates, and the ongoing withdrawal of quantitative easing. Add in US mid-term elections are likely to present challenges for Trump and this suggests markets will remain skittish. There is also the risk of another euro crisis, with concerns about Italy’s future and, to a lesser extent, the prospect of a hard Brexit.

During times of volatility, it is important to revisit our long term investment strategy. In equities, we are primarily invested in multinational companies that continue to find growth areas around the world, and whose success is often independent of the health of the wider global economy. In addition, the future is likely to be driven by the growing influence of automation, artificial intelligence, and robotics, and the efficiency gains these factors are having on traditional businesses. However, the revolution in tech is a double edged sword, because the dominance of the tech sector is partly responsible for the volatility we are experiencing. When the FAANG (Facebook, Apple, Amazon, Netflix & Google) stocks fall, this generally causes associated selling in the tech sector, which spreads to the wider market, which in turn impacts sentiment, and negative spiral ensues. It often takes some time before rational behaviour returns.

In summary, while falls in markets are always painful and there are real challenges on the horizon, there are equally reasons to remain optimistic. At some point the bear will rear its ugly head, but market corrections are healthy and a crucial element of long term investing, promoting more rational decision-making, and offering opportunities for active managers.

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