Overall, equity markets have been firmer in Q2 2019, driven largely by bond yields continuing to move significantly lower. The closely watched US 10-year Treasury yield fell back below 2% in Q2 2019, having risen above 3.2% only six months prior. Just as this (bond yields rising) was one the catalysts for equities to fall in the latter part of 2018, it (bond yields falling) has been a major driver of the strong returns we have seen this year in equities, particularly for growth stocks that enjoy relatively low interest rates. We have also seen some sizeable moves in other assets, notably gold, recently.
Whilst we are pleased to see a nice recovery in equities continue in the second quarter, global growth remains sluggish, principally in Europe. With 10-year UK interest rates now below 1%, there is a strong argument that investment funds with secure income streams yielding anywhere near 5% are attractive, as they also offer solid real returns in a low inflation environment. However, such low yields also imply near, or actual, recessionary conditions. This, we believe, will put pressure on growth stocks, particularly those not fully tested in previous tough economic conditions.
One area that does benefit when yields are low, geo-political tensions are rising and major currencies are volatile, is gold and gold shares (benefiting in a leveraged way). As the income penalty for holding a non-income generating asset falls, its finite level of supply becomes important, and acts as a secure store of value. The move in gold in June 2019 has been decisive, with the yellow metal breaking through $1,400 reaching its highest level since 2013. We have been positive on gold for some time now and believe this technical break-through could pave the way for further gains in gold.
Finally, we may be near to seeing a change of market preferences and history tells us one key factor to keep a close eye on, is the liquidity of the investments we select. That and a reinforcement of our preferred sectors will be a priority going forward. Of particular note this quarter has been the demise of one the UK’s most revered fund managers, Neil Woodford. Whilst we were not holders of the Woodford funds, it is a timely reminder of the risks associated with investing in illiquid assets, especially as we get closer to the end of the cycle, than the beginning.
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