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The story so far in 2018 ……

Posted by David Stevenson on 07/Sep/2018

looks like a test period for the major question troubling markets after such a prolonged bull run: what might prompt a correction, and what would be the response in the aftermath? At the start of the year, the consensus view was for sustained, synchronised global growth across the US, Europe and Asia. Whilst it was recognised that the US was likely to continue with its leadership in the normalisation of interest rates, it was thought that the Federal Reserve would not require a more radical cooling of the economy. This comfortable assumption was called into question in January with a surprise spike in US earnings inflation, which translated into rapidly rising bond yields. A US market sell-off then sparked global volatility. Weakness continued into late March, causing a 10% correction to the UK market from its January peak, as wider concerns gripped investors such as geo-political risks in the Middle East and Asia, and President Trump’s escalating rhetoric. Meanwhile, Trump’s tax reliefs were inflating the US economy by way of rate cuts boosting near term earnings, and also by allowing corporates to use repatriated overseas cash to fund share buybacks, thereby underpinning the stock market. This in turn generated a robust results season for US corporates, and a series of strong data points for US economic growth. Despite growing concerns about a slowing European economy, risks in emerging economies and an escalating global trade war, investor appetite returned and the UK stock market recovered all of its losses by mid-May, even if this strong momentum has cooled somewhat in recent months.

“Challenging” has become an over-used, almost devalued, term in company outlook statements and fund manager commentaries. However, its use is particularly pertinent at this point. A strong global economy, fuelled by ten years of stimulation, now faces the twin dangers of monetary policy reversal and an increasingly hostile trading and geo-political environment. The UK, as an open economy, has benefited from recent global growth but now faces its own individual risks as the Brexit deadline approaches. To date, the pattern in 2018 suggests there is still an appetite amongst global investors to “buy the dips”, but this may prove to have been an artificial, unrepeatable environment created by the impact of Trump’s tax cuts. Investors might feel that more challenging times are inevitably coming, but few want to speculate as to when.

Our portfolios can never be immune to wider market forces. Nevertheless, they continue to be dominated by a range of long term holdings in high quality companies serving specific niches in attractive growth markets. Our investment performance in the coming months will therefore be determined by the underlying robustness of these individual business models.