The Multi-Asset Process

November 2018 Market Review

Sentiment remained fragile after market declines in October, although a more dovish turn from the Federal Reserve and breathing space on the trade front helped calm nerves to some extent as the month ended. For our part, we used recent market weakness to move further towards target weightings across all portfolios, primarily adding to emerging markets on higher-risk offerings and more defensive assets on the lower-risk.

On some of our portfolios, we tend to rebalance quarterly but maintain flexibility to move if we see significant value. Given levels after selloffs in October, and the traditional ‘Santa rally’ often pulling markets to a strong fourth quarter, we felt waiting until January risked missing an opportunity.

Over in the US, we had the much-vaunted Mid-Terms early in the month, which as ever, served as a referendum on the presidency. Turnout was certainly a positive, the highest in more than a century, but as with so many elections in the modern era, both sides were able to claim some kind of victory. Some pointed to a major triumph for the Democrats, as it resulted in their largest one-time gain of House seats since the 1974 elections, while others highlighted Democratic losses in the Senate and mixed results in state elections.

Either way, President Trump continues his pugilistic brand of ‘politics’, rounding once again on his current favoured targets at the Federal Reserve. Ignoring the president’s traditional avoidance of commenting on monetary policy, Trump said he would like to see lower interest rates and, as expected, put the blame for Red October squarely at the Fed’s door.I think we have much more of a Fed problem than we have a problem with anyone else," he commented.

The President also talked up the prescient power of his ‘gut’ when it comes to monetary policy, claiming this organ gives him greater insight ‘than anybody else’s brain can’.

The Fed has raised rates three times this year and further hikes are widely expected, including one at the December meeting. More market selloffs over the course of November led to questions on whether the Bank will maintain these plans however and a couple of speeches potentially hint at a slight softening in approach.

Vice chair Richard Clarida continued to back gradual hikes but stressed monetary policy is not on a pre-set course and is now ‘more art than science’. Speaking a few days later, his boss Jerome Powell, the victim of ongoing vitriol from 1600 Pennsylvania Avenue, said rates are currently just below the range Fed officials consider neutral. This comes a month after he claimed the Fed was ‘a long way off’ neutral, comments that many believe played a large part in the Red October falls.

Powell also stressed the Bank has no pre-set policy path and will determine its moves based on what incoming economic and financial data dictates.

Across the Atlantic, the European Central Bank (ECB) confirmed the recent loss of growth momentum is not enough to derail plans to begin dialling back quantitative easing. ECB President Mario Draghi noted disappointing eurozone growth since summer but dismissed fears the Bank may be cutting support at the worst possible moment. The ECB is due to vote on ending bond purchases on 13 December but the decision is seen as a formality barring a major shock over the next couple of weeks.

Trade wars also continued to set the agenda over the month, with Trump meeting his Chinese counterpart Xi Jinping at the G20 summit in Buenos Aires. As ever, the imminent meeting was not deemed reason enough to curb rhetoric, with the US Trade Representative’s office accusing China of continuing a state-backed campaign of intellectual property theft.

In fact, the result surpassed expectations and the two leaders thrashed out a 90-day ceasefire over a steak dinner, which many believe should be enough to shore up markets heading into 2019. Beyond surface squabbling over trade, we believe the ongoing spat highlights a deeper fracture in the China/US relationship as the latter learns to deal with a shift away from decades of effective global hegemony.

Any positive interactions between the two giants is therefore to be applauded and we will watch developments over the 90-day window with interest.

Of course, the Brexit situation rumbled on the UK as the government pulled every lever within its power to get through a deal that looks, even through the rosiest-tinted of lenses, very much the best worst option. While many wanted out of Europe on ideological grounds, few can have predicted two years of wrangling to work out the economic realities of exit – and ultimately, that goes back to campaigns fought in June 2016 and before with scant basis in fact.

Any ‘deal’ with a giant like the EU was never likely to be favourable for the UK and the fact Theresa May has retreated into the fear tactics that stated this whole mess – her way or the uncertainty of ‘no deal’ – is hardly encouraging.

Apocalyptic predictions from the Bank of England added more grit to this murky soup, suggesting a worst-case Brexit could cause the pound to plunge and trigger a worse recession than we saw in the financial crisis. The Bank said a no deal with no transition period could spark an
8% fall in the UK economy and knock a third off house prices and a quarter off sterling. Of course, this led to howls of derision from the Brexiteers-in-chief, eschewing reasoned economic rejoinders and labelling Mark Carney a ‘failed second-tier politician’ instead.

On the same day as the Bank revealed its findings, photos of the last two Brexit secretaries David Davis and Dominic Raab co-winning Spectator’s Best Cabinet resignation award was an unedifying spectacle to say the least. All in all, another month ends with no definite idea of how our exit will look and the clock continues to tick down towards ‘B-Day’ on 29 March next year.

We have quoted Sir John Templeton heavily in recent months, in that “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” For us, the US is at stage three – and potentially well through that – but the rest of the world is still at two.

While we are moving through the cycle, leading indicators do not yet point to the risk of imminent downturn and global economic growth in 2019 should still surpass the post-financial crisis average. We think this suggests earnings and share values have room to advance.

For a comprehensive list of common financial words and terms, see our glossary here.


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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. 

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Monday, December 10, 2018, 11:07 AM