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Investment Update August 2018 Taking the Temperature;

At our recent Investment Committee meeting we discussed the increased volatility which has emerged in both stock and bond markets this year.

On the positive side global economic growth remains robust and unemployment is low in most large global economies. This is broadly positive for equity markets, which are driven by the macroeconomic backdrop. Despite recent volatility we do not propose any changes to the maximum equity content or fund allocations within our model portfolios because they are well diversified in terms of geographic exposure. Our full asset allocation views are outlined on the next page.

So, what is causing the volatility? We have identified some key themes which are outlined below:

Rising Inflation and Increasing Interest Rates

Inflation is rising in many major economies, fuelled by an increase in the price of commodities like oil and metals and by growth in wages. Interest rates have been steadily increasing in steps of 0.25% in the United States and the Bank of England has recently followed suit, raising interest rates to 0.75% in a bid to keep inflation in check and to reflect the positive outlook for economic growth.

Bonds are the asset class which are most affected by increases in inflation and interest rates. This is because they pay a fixed “coupon” (interest payment) which cannot be varied according to the economic environment. Inflation can erode the value of these coupons over time, whilst increasing interest rates can cause an increase in bond yields and a corresponding drop in prices because these two factors mirror each other.

Bonds are generally considered less risky than equities and have historically proven less volatile than equities over the long term. Therefore, an allocation to bonds has a part to play in diversified portfolios, especially for more cautious investors. We have undertaken a lot of research into different types of bond funds and have concluded that our preferred choice for uncertain times are Strategic Bond funds because of their flexibility. These funds can invest into any type of bond, government or corporate and aim to offer exposure to different parts of the bond market globally to spread risks, tap into the best yields available and avoid the types of bond which will be most affected by inflation or rising interest rates.

Trade Talks and Brexit

As of May 2018 (latest available data) the UK imported 55% of its goods from the EU and UK exports are evenly split 50/50 between EU and non-EU countries. A “soft” Brexit deal is looking increasingly likely, but uncertainty remains around the finer details and a several core issues must be resolved in the next 5 months. Brexit talks are likely to create further short-term volatility for both UK and European markets in the coming months.

President Trump’s strong remarks around US trade with Asia and the NAFTA agreements with Mexico and Canada have rattled many emerging markets in recent weeks. It is unclear yet whether the President is using tough talk to secure better trade terms or whether large-scale tariffs on imports to the US will be enacted, which would be very disruptive for trade and could ultimately reduce economic growth in certain regions like Asia. We are monitoring the situation but do not propose any asset allocation changes currently.

In Summary…


Equity market volatility has increased in the year to date.

Global economic growth remains strong, so the environment remains broadly supportive for equities.

US tax corporate tax cuts are positive for equities, but this may be offset by rising interest rates and inflation.

The US stock market has been driven by technology companies in the last 18 months. This has created volatility in the year to date.

UK economic growth has been stronger than expected. Brexit remains a wildcard.

A pick-up in economic growth is positive for European equities. Political factors are likely to cause short-term volatility.

Chinese government policies to curb inefficient infrastructure investments and property prices may hinder the equity market

Japanese equities are positively influenced by low interest rates, quantitative easing and tax policy.

This article is for information purposes only. It does not constitute investment advice and is not a recommendation for investment. The value of your investment and the income from them may go down as well as up and you could back less than you invested.

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