In January, it looked like the Great Rotation might finally have begun. For more than a decade investors and market gurus have been on the lookout for the moment when the bull market in bonds would come to an end and equities would take off. Central banks were raising rates, inflation was overshooting in the UK and poking above the surface elsewhere, economic growth looked strong around the world and equity markets were booming.
Jack Evans, EValue’s Asset Consulting Director, comments on the highlights:
At the end of the quarter, things look quite different. The FTSE has given up its gains of the last two years (or four in euro terms), the rate of inflation is falling again in the UK, and while rates still look like going up in the short term they don’t look like climbing as far as they did at the beginning of the year.
It’s not clear that an equity boom had far to go in any case but there is a lot that is not clear at the moment. At home, the impact of Brexit is still very uncertain. Internationally, there is significant threat of war of both trade and shooting type, and in the background there is mixed news about economic growth.
Top-down global concerns have been mirrored by share prices. Interest rates seem in harmony with this very minor key picture. Expectations for short term rates keep edging up while long term rates held steady or even fell. We are not yet in inverted yield territory, a famous bad omen, but this pattern might suggest that an economic slowdown is closer than previously thought.
Bottom-up projections, however, are not yet so concerned. In particular, the FTSE suffered more than other markets but that is not yet reflected in the fundamental outlook.
So this may not have been a great quarter for investors but higher interest rates and cheaper shares make for some kind of silver lining.
Prospects look brighter across almost all asset classes and the effect is quite significant in the short term. Even so, the scale of changes is rather underwhelming given the dramatic news coming out the market and elsewhere, and what excitement there is peters out over the long term.
So how have our recommendations changed? The rise seen in interest rates mean that in the short term investors see a tilt from Bonds into Cash. At longer terms, the relative attractiveness of UK equity over other developed equities is apparent. Emerging Markets have had a relatively good quarter and this is reflected in their increased presence in higher-risk portfolios at longer investment horizons. More detailed recommendations have been released to our core clients.