Investment Bulletin

Autumn 2017


After an unbroken 11 month rise in the total returns on the S&P 500, how far can markets climb when they are trading at record levels? This bull run has brought earnings to their highest valuation since the tech bubble in 1999. However, we believe that the key factor is not an imminent recession based on normal trading patterns, but rather, the potential end of Quantitative Easing (QE) and the withdrawal of liquidity from capital markets.

Should QE reduction become the main threat, there is also the issue to consider of its introduction in the first place. The banking system was extremely fragile a decade ago and, while recovering, is not yet back to full strength, would it make sense to withdraw funds so quickly that another crisis arose?

Our current view is that policymakers, particularly in the US, will start to gently apply the monetary tools that take the heat out of speculative markets. It can’t be comfortable for the authorities in different areas to watch the rise of the ‘crypto’ currencies such as the Bitcoin, particularly as this weakens confidence in the major currencies, and is also a helpful currency for the black economy.

While employment levels are at a high, many new jobs created are either part time or of vulnerable status, and there does not yet seem to be significant wage pressure to immediately threaten current record corporate profit margins. Some early signs are evident but in the UK, Brexit and its consequences, is putting a lot of emphasis on job security.

There are signs that there might be a change of emphasis in the type of security that the market favours, particularly if a more cautious mindset starts to take hold. With cash deposits and Gilts offering miserable returns, the focus on income is as strong as it has been in recent times. We have mentioned what we call quasi bonds in the past. For investors who wish to have a more modest risk profile, a strategy that includes exposure to this asset class may offer a more predictable level of total return from the income portion itself.

Turning to capital returns, it has been noticeable in most bull markets that when risk free rates of return start to rise, it puts pressure on the multiple that investors are prepared to pay. That factor has not really come in to play yet but when, as managers, we feel that this could be the next trend in market cycles, it makes sense to start to anticipate a change in investor preference. With the valuations of growth stocks historically stretched against value stocks, we still like equities, but it might be time to start taking some risk off the table.

Download

Important Legal Information

Opinions constitute our judgment as of this date and are subject to change without warning. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Interested parties should seek advice from their Investment Adviser. Charlotte Square is a trade name of Raymond James Investment Services Ltd (Raymond James), utilized under exclusive licence, Raymond James is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3779657. Registered office: Broadwalk House, 5 Appold Street, London EC2A 2AG. www.raymondjames.uk.com