Reflecting on August 2019
WHAT HAS HAPPENED?
Global equities, as measured by the MSCI All Country World Index, are broadly flat over the last twelve months. Following an extended bull run since the end of the global financial crisis of 2007 and 2008, equity market jitters have increased since last September, with the VIX Index, a volatility measure, significantly higher than its 2018 lows. Such jitters continued in August with negative returns from both developed and emerging market equities contributing to a 2.6% decline in the All Country World Index. The VIX Index averaged 19 during the month, up from 13 in July.
WHY?
Global growth expectations have been a key driver of equity markets over the last twelve months. Concerns over the prospects for the global economy have coincided with bouts of equity market weakness, however, the causes of such concerns have varied. During the last quarter of 2018, during which the MSCI All Country World Index fell by almost 13%, there were fears that the US Federal Reserve would raise interest rates at too fast a pace, having seemingly committed to a path of tighter monetary policy through the remainder of the year and into 2019.
Politics, including the US / China trade dispute and the ongoing uncertainty surrounding Brexit have also put a dampener on the global economic expectations of many, while the US yield curve has inverted – that is longer-dated bond yields have fallen below shorter-dated borrowing rates – often a harbinger of recession.
WHAT SHOULD YOU TAKE AWAY FROM IT?
While concerns over rising interest rates have all but disappeared as the US Fed actually eased monetary policy at the end of July, political uncertainty persists and may well do so for some time yet. Predicting political developments is fraught with difficulty and as ever we recommend making use of diversification to ensure that one’s portfolio is not overly exposed to any one political outcome. Exposure to a geographically diverse range of companies with exposures to different sectors and different economies can reduce the level of political risk within a portfolio of investments.
Furthermore, we look for companies that stand to benefit from exposure to structural growth opportunities, and those that operate high-quality businesses with competitive moats that should be able to perform well through market cycles.
Please contact your Investment Manager should you have any questions.
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