Investment Perspectives Autumn 2018
08 Nov 2018 - Estimated reading time: 10 minutes
Welcome to our autumn edition of investment perspectives.
Does 2018 mark the end of a 10 year bull run in equities? As the start of October saw further upward pressure on bond yields across the globe, equity markets took a hit just as global indices seemed set to surpass January’s all-time highs and, for the first time in a while, value stocks outperformed growth stocks.
This early into the quarter, it would be foolish to call the end of the bull market. However, equities certainly benefitted from significant revaluation as the yield on Government bonds and interest rates on cash kept falling and then stayed low. More recently, equities were further boosted by strong earnings growth as the global economy picked up pace. This story has been strongest in the US.
Although they are still low in absolute terms, US interest rates have continued on their upward trajectory this year. The persistence of the Federal Reserve, in both word and deed, is continuing to drive US Treasury bond yields higher, which feeds into higher corporate borrowing costs. Moreover, the cocktail of positive economic data, ever lower unemployment and global trade fears continues to put a floor under inflation expectations and real yields. Low bond yields have been the crutch for equity valuations and low credit spreads, and so these have come under pressure too.
This suggests that now might be the time for keeping some powder dry – better opportunities will probably exist sometime next year.
In the UK we have greater uncertainty – growth predictions are pure finger-waving when we don’t even know what Brexit deal we are aiming for, let alone going to get; rising inflation could be a concern if the pound weakens in the event of a poor outcome. Gilt yields had been rising in line with US yields, but Brexit news could destabilise this in either direction: fuelling the rise if investors demand a bigger inflation or sovereign risk premium, pulling yields lower if the risks to UK growth dominate sentiment.
So with this uncertainty, in addition to our usual quarterly market commentary, our autumn edition of Investment Perspectives includes three topical articles:
- Tom Dunster provides some insights to the drivers of the latest stage of the equity bull market.
- With a growing number of pension schemes buying bulk annuities, either as an asset of the scheme (buy-in) or to fully settle liabilities (buy-out), Michael Abramson and I provide some commentary on key issues to consider if you are looking at some form of settlement.
- Over the last quarter, it has become impossible to ignore the possibility of a no-deal Brexit. Alen Ong considers operational issues, highlighting those worth raising now with your managers, while Allison Galbraith looks at the implications for financial markets and what that might mean for investment risk management.