With just a few weeks of the year left investors could be forgiven for thinking they can stop watching the stock market and relax, but November and December can see some of the greatest market moves of the year – both up and down.
Before the year is out investors could see negotiations in Europe conclude with a ‘no deal’ Brexit and another rate hike in the US. Meanwhile political tensions continue between the US and North Korea and on the continent between Catalonia and Spain.
Anthony Rayner, multi-asset manager at Miton Asset Management, says: “There is a definite psychological pull to the end of the year, but there are a lot of interesting things going on in the market right now that it is important to be aware of.”
So what are the experts cautious of as the year draws to a close?
Mike Bell, global market strategist at JPMorgan Asset Management, is keeping an eye on the Brexit negotiations. We are now at the halfway point between the Brexit vote and the nominated date that the UK leaves and EU, and Bell is concerned that if politicians can’t reach a deal then the pound could weaken further.
“That is not a problem for FTSE 100 companies as they get a large proportion of their earnings from overseas, but smaller and medium-sized businesses which tend to be more domestically focused will be impacted in that scenario,” he explains. Indeed, much of the FTSE’s strength over the past year has come from the boost to firms’ overseas profits due to a weak pound.
But the average UK equity fund has around 42% of its assets exposed to small and mid-cap stocks, so investors could see performance affected if a ‘no deal’ Brexit transpires.
Bell is also watchful of the UK housing market. A recent survey by the Royal Institution of Chartered Surveyors (RICS) found that while house prices are currently stable, estate agents are not so positive about the outlook for London in particular over the coming months.
Not only would a fall in property prices hurt funds invested in bricks and mortar but it could impact other sectors too. Bell says: “If prices fall that could hit consumer confidence and consumer spending, and that will affect those domestically focused stocks again.”
Chinese Debt Worries Some Investors
Eoin Murray, head of investment at Hermes Investment Management is looking further afield. He is concerned at the ‘alarming pace’ that debt is rising in China. “In any other sector of the global economy in history, a similar rise has ended badly,” he says.
But a correction in the Chinese stock market doesn’t seem all that likely at the moment, he adds, as the closed nature of the market provides some protection. Much of the debt in China consists of loans from the government to controlled entities, which gives the state more control over how the debt is managed.
Peter Elston, chief investment officer at Seneca Investment Managers, is keeping an eye on central banks. “I’m concerned that they are going to get it wrong; that they are going to make a policy error and tighten too quickly,” he says.
He says the UK could be the most vulnerable to error as the Bank of England looks to balance tackling higher inflation with shaky consumer confidence and a vulnerable economy. Although, he adds, ‘it’s not all bad news in the UK’.
Globally, Elston says there is a strong parallel between now and in the 1930s after the Great Depression. “Back then, the US Federal Reserve tried to shrink its balance sheet and the economy went into freefall and the stock market halved. The economy simply wasn’t strong enough to tolerate a tightening of monetary policy,” he explains.
Elston is concerned that as central banks look to increase interest rates and shrink their balance sheets, history could repeat itself. While he is hopeful that central bankers will tread carefully, a policy mistake could spark a bear market earlier than investors expect.
“Unlike the Great Depression, however, if there was a flight to safety then bonds would likely perform very badly, which is unusual in that environment,” says Elston. He currently doesn’t invest in any bonds because he is concerned about yields; instead he is looking for bond proxy alternatives and investments which have a stable underlying income stream such as real estate investment trusts.
Miton’s Rayner, meanwhile, is concerned about the effect a major event could have on the stock market. Investors seem complacent after a long bull run, but he says there are signs of change. One of those is the fact investors have been selling high yield and emerging market bonds – “they are two good gauges for how the market feels about risk,” says Rayner. He has been reducing his holdings in expensive stocks which have performed well and moving into cheaper alternatives.
He adds: “It’s time to be a bit wary and be ready to adjust your portfolio; the market dynamics seem to be changing. It’s not time to start thinking about the Christmas turkey just yet.”
