As we gear up for Harry and Meghan’s wedding this weekend, investors are gearing down.
Following a goldilocks period of 404 days without the S&P500 selling off by more than 3%, we are finally seeing a return to more ‘normal’ market conditions as volatility has returned.
Whilst there has been heightened concern within markets, a breach of the 3% level on the US ten year government bond yield and a flattening of the yield curve, we remain cautiously optimistic.
We are yet to see ‘Bondageddon’ (mass rotation away from bonds) as there remains a number of key buyers in the market place, for example China remains supportive of US Treasuries, with their total holdings at $1.18trn, and pension funds continue to match their liabilities.
At the centre of the market volatility are the ongoing talks (threats) of trade wars and protectionism. Clearly much of this remains speculative as little detail has been proposed, and whilst easy to get caught in the weeds, it is recommended to refrain from making speculative calls and focus on sound long term investment cases.
The key risk for clients this year remains the path of future interest rates, as robust economic growth and increasing inflation expectations have prompted fears around the speed of normalisation, and that all important forward guidance from policy makers. There are a number of ways to reduce the interest rate sensitivity within client balance sheets whilst also protecting from downside risk.
When overseeing assets, it is key to cut through the noise and when investing cash balances into financial markets, focus remains on strong companies with solid balance sheets.
Company earnings have increased year on year by 24.6%, and our preferred area remains the tech space.
Despite concerns around Facebook and data privacy – which notably affects all industries, not just technology, earnings were up 63% year on year, with 2.2bn users and generating a return on equity of 28.8%.
The Royal wedding is expected to cost a staggering £32m, which includes £300,000 for Meghan’s outfits, including her bespoke wedding dress, however the majority of the £32m is to be spent on security.
Technology companies have also been spending their money - in Q1 alone, Alphabet, Amazon, Facebook and Microsoft spent $16.2bn on capital projects – 68% higher than in Q1 2017! Apple are returning $100bn back to investors and set to increase dividends by 16% - notably Apple accounts for 6 of the top 10 quarterly buybacks ever! This is just the start as buybacks and dividends for US companies are set to be in the region of c$1trn for 2018 providing further support and rationale for remaining overweight equities.
There are numerous tech focused
funds, such as Polar Capital Global Technology fund which can act as a proxy for these tech disruptors, with their focus on digital marketing, ecommerce and robotics.
Expect further volatility around the trade talks as Trump continues his pursue his Madman Theory, however the increased volatility has reduced correlations amongst individual securities, allowing true active management (alpha generation) to shine through. Actively managed funds, which can protect on the downside, in the US space can be beneficial here, for example Findlay Park American fund. Findlay Park returned +23% in 2017 versus the S&P of 21% - yet it doesn't own Apple and doesn't own Amazon! Its strongest sector performance came from healthcare.
Whilst short term volatility and uncertainty can catch you off guard, good portfolio construction is designed to take account of these fluctuations, and can generate income and capital gains over time.
Quoting a reader called Wise Sage in the Financial Times ‘the Royal Wedding can be viewed as an investment [rather than an expense]. The ‘investment’ will be repaid many times over the years via ‘goodwill’ tourism and many other ways.’
Very similar to an investment portfolio….
Happy Royal Wedding Day!
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