News & Views

February 2018 Market Update12 February 2018

The market had priced in a very modest pickup in inflation hence the negative reaction to the spike in US payroll numbers last week. Unemployment levels have been at lows for some time now and hence many investors have been querying why wages had not materially increased. Friday’s payrolls report showed wages growing at their fastest pace for over 8 years, and now that this has been highlighted it has fuelled upward revisions to inflation expectations, and sparked speculation that interest rates may need to be raised more aggressively. We expect interest rates and inflation to remain low for longer, and believe that this market reaction is based around views of the Fed being behind the curve thus underestimating pent up inflation pressures. The volume of monies now invested in passive, quant based strategies, means the moves seen have been sharper than perhaps experienced historically.

In our view we have seen a healthy correction, after a strong upward run, which was based around rising bond yields from a very low base. Underlying economic fundamentals justify current valuations and we expect active managers to use this market correction as an opportunity to put cash to work. Investing in stock markets should not be a short term strategy, so whilst sentiment can and does drive very short term returns, it is the long term returns that we predominantly focus on, and longer term the economic picture still looks satisfactory.

Within our portfolios we select a range of assets and research each fund’s potential not only for growth but also with a focus on downside volatility and hence we would expect our portfolios to weather the storm comparatively well, time will tell! Our fixed interest exposure has already been positioned with an anticipation of rising interest rates, so the short dated nature, exposure to inflation linked bonds and floating rate bonds should see these funds fare better than their peers.

Our multi asset approach should also be a contributing factor, for example the absolute return funds included within our models should experience lower volatility than the markets, and we will be actively monitoring the drawdowns in these weak equity markets to ensure that the fund managers are meeting our expectations.

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