Quarterly Review

Balancing Tensions

David Wheildon / August 2019

The first half of the year might have seen some modest growths and returns, but we should continue to manage our expectations, suggests David Wheildon. Uncertainty looms in the markets, as people respond to various political potentialities still playing out and it leads to a world of mixed messages at the moment. Caution in the short term with optimism for the long is the best approach.

The half-way point in the year brings an opportunity to try and decipher the messages the markets are giving us, consider how the last six months have treated us and what lies ahead for the next few months. The first six months of 2019 have produced very satisfactory returns which, on the surface, suggest we should all be jolly happy. Unfortunately this timeframe is somewhat advantageous because it ignores the market falls towards the end of 2018. However even taking these into account the Year to Date figures are perfectly satisfactory and there is a general feeling of contentment from the last few months.
All is however, not entirely rosy in the garden as not only are stock markets looking content we also see bond markets on the move upwards. Bonds are loans from investors (you and I) to companies, institutions and even Central Banks (such as the Bank of England) and are seen as a “safer” investment. The fact that there has been an increase in the price of Bonds as more buyers look to acquire them suggests the presence of a degree of concern and even fear in fund management circles. There is a burgeoning feeling that equity markets are due something of a correction and the strength of feeling determines the level of desire to purchase safer holdings. Against this background, however, inflation is not racing out of control and there are no obvious signs of overheating in our housing market.

 

MIXING MESSAGES

On a wider scale it is now some ten years or so since the global financial crisis of 2008/9 and this is a long run of economic growth; admittedly it was from low levels but nonetheless it’s still a lengthy period of growth. In early 2018 there were concerns that economies might be getting ahead of themselves and that interest rates may need to rise further towards the end of last year.

That fear has disappeared to be replaced by the expectation now of a lowering of interest rates in the US and possibly even the UK. This is dependent on the No Deal outcome of “you know what” and the resulting impact on the strength of Sterling. The Pound is already reasonably weak and if you are travelling abroad you will really feel how weak it is with some venues offering less than 1 Euro for each Pound. A weak currency is good for exports, but it is inflationary which results in less profitability generally and can lead to interest rates moving back up again and in the medium term into a slowdown or even recession.

We currently reside in a world of so many mixed messages it makes Bohemian Rhapsody look like a completely transparent and clearly understood refrain. At times like this we should hope for the best but prepare for the worst.

 

MANAGING EXPECTATIONS

As mentioned in previous Reports we took a decision in the autumn of 2018 to generally lower the risk profiles of portfolios due to the uncertainty relating to the “imminent” departure of the UK from the EU. Although we took the decision for very different reasons we are now very content to maintain this slightly more defensive position in the light of the more global concerns as evidenced by the plethora of mixed messages emanating from the global economy. Particularly when we then add to the mix the political tensions in the world; not content with the China/US trade issues, our own Brexit (there I’ve mentioned it) and now Conservative Party uncertainties, we now have the rising tensions in the Middle East with Iran and its reaction to the latest sanctions. Notwithstanding the tweets put out by the “Leader of the Free World” in America there is a general feeling of discomfort in the global political arena which is unlikely to dissipate in the coming weeks. All things considered therefore we feel it prudent to remain more defensive than aggressive until at least some of the current issues are resolved.

Success in investing comes from taking a medium to long term view and not becoming over excited by the pleasing returns of the last six month period but also not becoming despondent should markets suffer a correction. We are in for the long haul and so should you be; with that in mind we should look forward to good, long term, positive returns over time and see the value of our investments increase ahead of inflation, so that in real terms we are accumulating wealth despite the occasional bruise or knockback in our attempts to move ever forward.

This article is the opinion of David Wheildon,
Director of The Legal Brokerage.

This article is the opinion of David Wheildon