Quarterly Review

A Watchful Eye, A Steady Balance

David Wheildon / February 2018

A lot can happen in a year. David Wheildon is not a man for crystal ball gazing but, in his analysis, small incremental alterations in the status quo are being felt. In consequence, we need to maintain a careful balance between optimism and preparedness. Despite stock market upturns the beginning of 2018 is a time for vigilance.

AT THE beginning of each year the tendency is to look ahead and predict market performance for the coming 12 months. There is a general feeling of déjà vu this year as the outlook for 2018 bears remarkable similarity to that of 2017, albeit that we are a year further into the reduction of Quantitative

Easing and heading further towards a return to more “normal” global Central Bank policy.

In the long term this is good news, as it shows the global economy to be in reasonable health and more capable of standing on its own feet than in previous years. However, in the shorter term it does mean we will see a gently rising interest rate cycle continue. America is leading the way and we expect the Federal

Reserve to increase rates steadily through 2018 and 2019; although the increases are likely to be in steps of 0.25% we do expect there to be 5–7 increases over the next two years, bringing rates closer to or even above the long term expected level.

In the UK we are behind America in the economic cycle and rates moved by 0.25% in the autumn of 2017 with further expected increases later this year and through 2019, again in 0.25% steps. Europe is still further behind in the cycle and rates are less likely to increase in the short term.


Raising interest rates is a delicate balancing act used by Central Banks as a way of keeping a lid on inflation. The fact that rates are rising should be seen as good news for the global economy as it suggests there is real growth which must be restrained before it gets out of hand – ie: excessive inflation. The balancing act is that if rates are raised too far or too fast they can kill off growth and damage sentiment – thereby driving economies down towards deflation (falling prices) which can take years to recover from.

The current outlook suggests that the risks of deflation have receded but growth is still not yet overly strong, so the balancing will need to be delicate for some time to come.

The raising of rates in the UK seemed to be at the point at which the economy began to falter, with news of slowing new car sales and a fall in consumer confidence. Therefore, the timing of the rate rise was called into question. The recent small drop in the inflation rate suggests that the rate rise has done its job but with growing consumer concerns, a further rate rise in the UK may not be too soon.

In the Far East the Chinese have weathered their problems from 2015 and appear to be settled into a system of reform and growth. Their economy is still expected to grow at a startling rate (compared to

Western levels) but at a slower pace than it has in previous times. This is good news for world trade and will help sustain growth in many different sectors. Following the steps put forward by President Trump it now looks as if China is more amenable to free trade and open markets than America which, although ironic, does show that opportunities can arise from every difficulty.


Following the crisis in 2008/9 the pendulum of financial regulation swung back from free and easy to potentially overzealous and it would appear that with the Banks in a more stable position the advent of yet more regulation may have peaked. There’s no question of the Banks acting in the manner they did in the early 2000s but a slightly more relaxed attitude to lending will be a major help to businesses looking to expand.

Although we don’t expect 2018 to be a stellar year in performance terms there are sufficient reasons to feel positive and that we will see very satisfactory returns. As is often the case risk management will be to the fore and the regular rebalancing of portfolios is crucial to this. We continue to adopt a more defensive stance within the fund choices of the portfolios and are wary of the outcome of rising interest rates following a decade of Quantitative Easing. Quantitative Easing has never been used before and its continued withdrawal is bound to affect markets; with no history to follow we wish to be in “prevention rather than cure” mode should markets react badly. With this in mind we do expect 2018 to be positive but under the banner of Steady As She Goes.

This article is the opinion of David Wheildon