The Multi-Asset Process

August 2017 market review

August was a slightly more volatile month than we have grown used to in 2017 – largely due to sabre rattling (of the nuclear variety) by the US and Korea and bracing for the impact of Hurricane Harvey.

President Trump’s ‘Fire and Fury’ comments understandably spooked investors and saw the Vix index – which measures the volatility of US stocks – spike, but history tells us that pulling out of markets amid such skirmishes has rarely been a sensible move.

Despite the best efforts of politicians, most equity indices remain at elevated levels and the FTSE 100 for example, despite spirited intra-month movement, ended August flat around the 7400 level.

As has become the norm post-Brexit, this market resilience was against a fairly average economic backdrop. Data released in August showed disappointing consumer spending, exports and business investment in the UK, which is currently showing the slowest growth of all the G7 economies.

Brexit continues to cast a shadow over the market, with a third round of negotiations yielding precious little new information beyond ongoing political posturing. Article 50 states we will leave the EU in March 2019 regardless of the nature of any exit deal struck and current sticking points surrounding Northern Ireland's border, citizens' rights and financial contributions owed will take time to resolve.

Elsewhere, political dysfunction in the US looks in stark contrast to improving sentiment and data in Europe, where Macron’s election victory in France appears to have put firmer foundations under the region.

During what is traditionally a quiet period for markets, the annual Jackson Hole summit of central bankers came under greater scrutiny than ever for signs of how policymakers intend to withdraw from quantitative easing (QE) packages.

In fact, both headline speakers – Fed chair Janet Yellen and ECB president Mario Draghi – largely avoided immediate policy concerns and elected to focus on financial regulation and defending free trade instead. Of course, the latter was widely seen as an attack on Donald Trump’s protectionist and regulation rollback policies and has increased speculation about what will happen when Yellen’s term as Fed chair expires in February.

In Europe, all eyes now turn to the ECB’s 7 September meeting but it remains to be seen whether that will set out a viable roadmap for winding down quantitative easing.

Strong performance from the euro over 2017 has brought the single currency to near parity with sterling, boosted by its safe haven status plus strong performance from the German and French economies. Minutes from the last ECB meeting revealed some concerns about currency strength however, particularly for countries keen to export their way to better growth, and it will be interesting to see if that is enough to push QE tapering plans further out.

On the interest rate front, consensus is shifting towards the Fed sticking for the rest of 2017 and then potentially twisting again some time mid-2018. Reflecting their earlier stage of economic recovery, Europe and Asia are not expected to start tightening until after that point and as stated, with Brexit still rumbling on, the UK’s rate policy is anyone’s guess.

Looking to the rest of 2017, we have been surprised not to see the kind of 5-10% correction that has traditionally been a function of healthy markets but would not be overly concerned if such a recalibration does materialise.

We see a number of triggers that could lead to a correction, not least the slow death of QE, but unless some black swan appears around the corner, we cannot see an imminent crash – although my crystal ball is no clearer than anyone else’s.

We have always said that we only change our portfolios when the facts change and at present, the pattern of synchronised – albeit moderate – global growth, with inflation under control, remains in place. There is obviously political risk around but corporate profits are improving and supporting valuations.

It also remains the case that risk-free assets continue to yield less than central bank inflation targets, encouraging investors into risk assets. This introduces more volatility, which can obviously hit performance in a correction, and for us, reinforces the case for volatility targeted portfolios.

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Friday, September 8, 2017, 7:39 AM