As predicted, market volatility has continued over the past few months as a sequence of events fed into investor sentiment. Most recently, we had concerns over the political situation in Italy which settled down with the emergence of a somewhat more stable picture and the formation of a government. We have also had the announcement from the US of tariffs on steel and other products leading to speculation about a possible global trade war. Related to this, over recent days, we witnessed the debacle which was the G7 Summit, although market reaction to this has been somewhat muted so far.
The ‘bigger issues’ likely to impact on markets over the coming months and years include the following:
- A Trump inspired trade war could be a significant negative for markets, although possibly shortlived.
- A combination of significant tax cuts and historically low inflation in the US will likely lead to inflation reappearing sooner rather than later.
- Debt levels in China will almost certainly cause a crisis in that economy at some point.
- The unravelling of Quantitative Easing (QE) around the world, which has provided such a support to financial markets over recent years, can hardly be positive for markets.
While all of the above are likely to be negative influences, it should be possible to manage each of them to the extent that the outcome may be relatively benign. In addition, the global growth picture in most developed markets, and to an even greater extent in emerging markets looks very supportive for markets.
Following a weak first quarter, markets generally recovered over the past three months. Most markets look quite flat year to date in local currency terms but exchange rate movements give a generally improved picture when the performances are converted to euros. The US, up by almost 6% year to date, and Japan, up by 4%, are the standout markets.
H1 2018 H1 2018 (in euro terms)
US +2.6%* +5.8%*
UK +1.6%* +2.1%*
Europe -0.5%* -0.5%*
Japan -1.1%* +4.0%*
Ireland +0.4%* +0.4%*
China -1.6%* -0.4%*
* Source: Financial Express Analytics
Looking out into the remainder of the year, much will depend on how the Trump inspired trade war develops. Both China and the EU have strongly signalled their intention to respond and have gone as far as identifying the industries and even the companies they are likely to target. Against that, the US economy does look in rude good health at present, with worker shortages appearing in a number of regions across the country. Generally, we are maintaining our cautious, but not necessarily bearish, view on equities for the rest of 2018. In terms of new investment in equities, we continue to advise clients to take a phased approach and to lean towards funds with a focus on income. Weak phases in markets could present good buying opportunities. Longer term, we remain most positive on continental Europe and emerging markets, while bearing in mind that a trade war could be quite negative shorter term for emerging markets.
We continue to hold a positive view on property as a core long term asset for pension funds. We see property first and foremost as an income producing asset and our preference is for ungeared, diversified funds which distribute income back to investors. However, the property market can give rise to shorter term investments of an opportunistic nature. The residential market in greater Dublin, and in certain other urban locations in Ireland, currently represents one such opportunity and Harvest has partnered with a number of selected developers to bring residential development investments to clients. However, these are not low risk and should never be viewed as core investments.
Increases in interest rates in Europe are looking even further away and when the cycle turns, rate increases are likely to be slow. As a result, cash should not be seen as a core long term investment for any pension fund and other low risk income producing alternatives should be considered. Harvest has constructed a Cash Alternative Strategy which will give investors an annual return of 3-4% without involving high risk. Clients should see this as part of the solution for the cash element of their fund.
As always, you should only consider the investment views contained in this newsletter in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact your Harvest Financial Services Client Manager on 01 2375500 or email firstname.lastname@example.org