Volatility More Apparent but Trends have been Positive
While there were plenty of negative phases, markets generally made further progress over the third quarter. Even the threat of a Trump impeachment has done very little to derail things. The fact is that none of the big issues overhanging markets have gone away, nor even reduced in their severity, but investors would appear to have become more sanguine in terms of the outlook. That said, the fourth quarter has started badly which may be a sign of what’s to come.
Reasons for uncertainty are still plentiful:
- the US/China trade war continues to ebb and flow fuelled by regular updates from Trump in relation to a shifting US position
- fears of a possible recession in the US in 2020 also overhang markets, not helped by recent economic and manufacturing data which showed weakening trends
- Brexit and a mixed economic picture are the dominant issues affecting European and UK markets
To these issues can be added the fact that asset valuations for both bonds and equities are high by comparison with historical norms which all adds up to the likelihood of ongoing bouts of volatility over the coming months.
Equities – As the table below shows, most of the major equity markets moved positively over the third quarter. Strengthening currencies helped both the US and Japan perform strongly in euro terms over the three month period. We expect currency factors will continue to influence markets in the coming months with the dollar and the yen likely to further strengthen against the euro. For the UK, Brexit is likely to be the single determinant of market direction over the coming months. At the moment, markets would appear to be betting on a deal or an extension rather than a hard Brexit.
|Q3 2019 (in euro terms)||YTD 2019(in euro terms)|
* Source: Financial Express Analytics
We are still more inclined to be cautious rather than bullish over the short term. That said, it is certainly not a time to avoid equities altogether. Valuations, while on the high side, are not out of line and there is still value for the long term investor. We do advise phasing any new investments into the markets to help dilute any short term market corrections and we also continue to encourage a focus on income as an indicator of underlying value.
Property – Real estate assets in most developed markets (US, Europe, Ireland) have edged upwards over the course of 2019 so far as investors continue to chase yield unavailable elsewhere. Harvest continues to be a fan of property exposures in most portfolios although our preference is for diversified liquid fund structures as opposed to direct investment in physical assets. We are maintaining our positive stance on property generally, both as a source of income and of longer term value. The Harvest Liquid Property Strategy, incorporating three international and Irish funds offering both daily liquidity and income, continues to do well. On average, the strategy has risen by more than 20% year to date and is currently yielding almost 5% per annum.
Gold – Having risen quite strongly over the first half of the year, the price of gold seems to have found its level for now and changed very little over the third quarter. Given the less than positive outlook for asset prices generally over the next year, we expect that gold will see further positive moves and we continue to recommend a small exposure across client portfolios.
Cash – While cash should not be seen as a core long term asset, holding a position in cash over the shorter term may well be advisable. The Harvest Cash Alternative Strategy, comprised of three liquid low volatility funds, has returned over 7% year to date 2019, well ahead of any cash deposit.
As always, you should only consider the investment views contained in this update 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 Advisor or call us on 01 2375500.