It’s undoubtedly been an interesting time for global investment markets. Following a strong 2017 for many growth assets, 2018 has seen a return to more challenging conditions. Confirmation of the continued upward path for interest rates in the United States, combined with escalating trade tensions has resulted in volatility not seen since early 2016. This comes just as the European Central Bank slows its stimulus program, ensuring there is no shortage of uncertainty to be navigated by investors.
Against this difficult backdrop, equity markets have, nonetheless, managed to post impressive medium-term returns. Emerging markets have borne the brunt of the recent volatility, especially in China, yet have still delivered healthy gains over the last twelve months. Returns from Japanese and United States equities over the past twelve months have also been strong with U.S investors further buoyed by corporate tax rate cuts and solid earnings results.
When put in this context, the June setback is not nearly as eventful as the fear-induced headlines might suggest. Yes, some emerging markets have had a very tough period, with key markets such as Brazil and Turkey losing a lot of ground over a short space of time. Emerging market debt has also struggled, both in hard and local currency terms, amid the flight to safety, as has high yield credit.
Yet, government bonds have generally held ground and our cash positioning provides ammunition should such developments persist. We also note that the broad equity market performance is actually quite muted, with healthy performance in consumer staples and healthcare offsetting some of the weakness among cyclical exposures. This is all part of the market rambling an investor must deal with.
Does the Economic and Political Chaos Matter?
It's incredibly hard to know how the economic and political events around the world will play out. We are especially sceptical of anyone trying to position for these events in advance as it rarely adds value to portfolio returns.
The bigger opportunity, to our way of thinking, is to assess valuations in both equity and bond markets in a world where investor sentiment appears complacent. It's always difficult to predict the timing and catalyst for any strength or weakness, of course, and we are not forecasting some imminent or catastrophic decline. Instead, we insist on the need to be prudently positioned, given a focus on the preservation of capital, and ensure we remain fundamentally diversified. By doing so, we can redirect our attention to what really matters.
Are There Any Pockets of Opportunity on our Radar?
We can see opportunities that we think will contribute to portfolio returns over the longer term. The U.K. remains an interesting proposition, especially among large-caps, as poor sentiment amid Brexit uncertainty sees retail money leaving this market. The underlying investment case for emerging markets equities also remains largely intact, especially in emerging Europe, and to a lesser extent Asia, built around improving earnings and attractive valuations.
Lastly, Japanese equities appear reasonably priced, with the continued focus on their corporates improving shareholder outcomes, increasing dividends and buybacks and improving profit margins. By contrast, the U.S. remains far less compelling.
Among defensive assets, emerging market debt continues to offer very attractive yields, with U.S. bonds increasingly representing better value too.
What Impact Does this have in the Bigger Picture?
While negative short-term performance is never comfortable, it does open the door to future opportunity. We therefore seek solace in these periods, as these are the prime moments for us to deliver the greatest value for investors.
Bringing this together, we believe the market conditions are challenging although not incomprehensible. Achieving positive portfolio outcomes continues to be our long-term focus, which is driven by a willingness to be different from others and in applying a disciplined investment approach.
