September marked another month of strong economic data emanating out of the US, and another round of interest rate hikes from both the Federal Reserve and Bank of England.
So strong has been US data, it would be fair to use emotive terms such as ‘booming’ to describe the world’s largest economy. US consumer confidence is at its highest level since 2000, jobless claims fell to their lowest since 1969, and the forward-looking ISM Services index is now at a 21-year high.
While US equities have been the main beneficiary of this strong data through most of 2018, the impact in September was most pronounced on bond yields. The spectre of inflation is rising and low unemployment levels seem finally to be translating into wage growth (now at its highest since 2009).
All the fixed income trackers we hold in the Flying Colours portfolios lost money in September. The worst performing, the iShares Overseas Government Bond index, fell 1.6%, while the funds tracking corporate credit markets were all down around 0.75%.
Another key factor driving markets in September was the continued rise in the oil price. WTI Crude hit the $75 a barrel mark in the month, boosting the returns of oil and basic materials firms.
UK equities rose marginally – but this was almost entirely down to the well-represented Oil & Gas and Basic Materials sectors, which rose 6.2% and 5.9% respectively. Most other sectors of the UK market recorded negative returns, and indeed the more domestic-facing FTSE 250 index fell 1.6% in the month.
Finally, turning to emerging markets, which have been the laggard this year, it was another lacklustre month for equities (-0.7% in September in sterling terms) but a better month for emerging market debt.
The EMD Local Currency Bond index rose around 1.8% but is still down around 5.4% in 2018. This has been the main drag on the Flying Colours Dynamic portfolios this year, but remains an area of high conviction given the attractive real yields on offer.
There has been a recent sell-off in US equities that has led to a domino effect in Asian and European markets. The main reasons being cited for this sell off are concerns about a trade war between the US and China, the fear of rising US interest rates and rising bond yields, as well as the tensions between Italy and Europe.
In summary, we believe that:
- Movements like this are completely normal in equity markets and we don’t believe there is enough evidence at the moment to rush out of equities.
- Picking the top of markets is extremely difficult; very few people can do it successfully and we believe being patient and disciplined gives better outcomes
- Time in the market is better than timing the market
- We can add more value following a downturn
- Our investors should stick to their long-term strategy, but ensure their risks are aligned with their financial goals
Movements like this are completely normal in equity markets. Analysts are citing lots of reasons to be concerned, not least of which is that we are a long way into economic expansion and the current bull market has been going on for many years. However, the central banks are still supportive of equity markets and interest rates are still relatively low. We don’t believe there is enough evidence right now to rush out of equities.
Picking the top of markets is extremely difficult. It is a very rare money manager that can consistently adopt this approach successfully. Calling the top or the bottom of a market cycle is not what our investment philosophy is based on. First and foremost, we try to manage risk. Our model portfolios are designed to offer diversification by type of asset and by region, and we try to produce the most optimal mix of assets for any given level or risk. We believe in a patient and disciplined approach to investing.
The bears have been calling the top of the market for many months. So far, they have been wrong but if they keep calling it, at some point they will be right. It is plausible that this is the start of something nasty. On the other hand, all the factors that have driven the market growth are still in place. Even though we might be proved wrong, we’re patient and we don’t like to make hasty mistakes.
We believe in the old and time-tested adage, that time in the market is better than timing the market. We believe that being out of the market can be more detrimental to long-term returns than staying in, and we know from experience that over long periods, disciplined investors fare better than those who move in and out of markets. The report we commissioned in 2015 showed that the average investor underperforms the market by more than 2% per year because they are unable to time the market with any degree of certainty.
We believe we can be much more decisive towards the end of a downturn, and we may look to increase the risk following a significant market correction (for example, by increasing our exposure to smaller companies). When the odds significantly shift in favour of doing something, we would do it.
Right now, we cannot say that selling down equities is in the best interests of our investors. We believe that our investors should stick to their long-term strategy. It is important that clients are comfortable with the level of risk they are currently taking and must ensure they are not taking risks they can’t afford to take. Investors should speak with their financial adviser to ensure their investments are aligned to their financial goals.