18 October 2018

Keep an eye on the big picture

They say a week is a long time in politics. It can be close to a lifetime in the investment world, too.


Just two weeks ago I was remarking on how little was going on in markets, why a likely Brexit deal was pushing the pound up and how robust a market the S&P 500 was proving. Within a week news started coming in thick and fast, the Brexit negotiations foundered over the issue of the Irish border and we had a flash crash in the US that took 7% off the value of the S&P 500 Share Index in a matter of days.

Our own FTSE 100 Share Index fell to around 10% below its peak, but some other markets have suffered much more dramatically. In China shares are nearly 30% lower and many emerging markets have been hit by a wave of selling. The background to this sudden tide of nervousness is the increase in interest rates by the US Federal Reserve Bank and the tightening of monetary policy there. This is expected to lead to a liquidity squeeze which will impact on the developing world most, though few will escape its consequences.

Yields on government bonds in America have been rising, driven by higher interest rates. Quite where it will all end is uncertain, but many expect the interest rate peak to be some way off still. Meanwhile, the International Monetary Fund, which has recently completed its annual meeting in Bali, is warning that global economic growth is likely to peak this year and could be hit by a worsening trade war between the US and China. But perhaps remarkably the sell-off in shares was short lived. Just a week after the fall, a 2% plus gain was recorded in a single day for the principal American equity index, though admittedly the previous week’s losses were not recovered, while volatility also dropped.

Presently much of the news emerging on the macro front does not give much comfort to investors. A trade war, tighter monetary conditions, slowing economic growth, possibly a messy Brexit – none of this adds up to a Goldilocks scenario for investors, yet buyers emerge on bad days. It all goes to show that the business of forecasting in the investment business is fraught with difficulty. That great economist Keynes once said there are two types of forecasters – those who don’t know and those who don’t know they don’t know. With so much happening that could affect the direction of markets worldwide, I’m inclined to sit on my hands right now.


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