The Multi-Asset Process

January 2018 market review

As has become the norm over the last year, we had market highs and political chaos during January.

Equity markets enjoyed their best start to the year since 1987, buoyed by President Trump’s tax reform, with the S&P 500, Dow Jones and Nasdaq all hitting fresh peaks
. By the end of the month however, markets dropped off slightly, snapping a 300-plus day streak without a 0.5% decline.

Meanwhile, the US government went into another of its intermittent shutdowns, with Democrats and Republicans unable to reach agreement on spending plans.

Ten years on from the financial crisis, recovery finally appears to be self-sustaining and policy, generally speaking, is on a tightening path. But some commentators have noted a mismatch between fiscal and monetary decision making: as central bankers drain liquidity from the system, politicians, whether via tax cuts or easing back on austerity, are looking to create demand.

When this fiscal largesse begins in earnest, we can assume central banks will react by raising interest rates – three hikes are expected from the Federal Reserve in 2018 for example – which is an obvious risk for bonds and could also put equity valuations under pressure.

Inflationary pressure and concerns about tightening have already been evident in rising bond yields over the month, with 10-year Treasuries climbing to the highest level since 2014 and five-year German bunds since 2008. Commentators have been calling the end of the multi-decade bond bull market for several years now but when someone as respected as Bill Gross declares the start of a bear market for the asset class, as he did on 9 January, it may be time to take notice.

As we have said before, our crystal ball is no clearer than anyone else’s but this monetary/fiscal disconnect is another potential concern to keep an eye on as the year progresses.

Naturally, Brexit was in the news over January, with growing talk of a second referendum. Economist Jim O’Neill, a former Conservative Treasury minister and Remain supporter, wrote that the UK’s growth forecasts are likely to be lifted and China, the US and Europe continue to improve and this should ‘dwarf’ any negative impact from Brexit.

He said that far from changing his mind about the Remain case, he wondered how much better we could be doing without Brexit holding the UK back.

Elsewhere, we saw a fairly muted meeting from the European Central Bank (ECB), although commentators suggested economic data is becoming too strong for the Bank to maintain stimulus for too much longer.

One point to note, as the Bank kept rates on hold, was pointed remarks from Mario Draghi emphasising concerns among central bankers over the impact of exchange rate swings. This followed comments from US Treasury Secretary Steven Mnuchin at Davos, taken to indicate a burgeoning weak dollar policy and sparking fears of a trade war.

As outlined in recent updates, we are currently eyeing an opportunity in value stocks, where performance remains far removed from surging growth companies. We felt this could be a theme for 2017 but value has remained depressed and we believe now may be a good time to increase exposure to this cheaper end of the market.

We see this as a broad trend, most obvious in the US, but also prevalent across Europe, Japan and emerging markets, and have tilted the portfolios towards value.

While we remain positive on equities, we have to be wary of complacency as the bull market enters a ninth year. One market streak finally ended in January but the S&P 500 also went through its longest even period without a 5% fall, breaching 400 days and overtaking the height of the dot.com boom in the late 1990s.

We have continued to stress our surprise not to see the kind of 5% to 10% correction that has traditionally been a function of healthy markets and any such pullback, as ever, should present opportunities for long-term patient investors.

Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Tuesday, February 6, 2018, 2:46 PM