Investment Bulletin

Winter 2019


The final quarter of 2018 reinforced our view that we are now late cycle, and that a purposeful, active asset allocation strategy is appropriate. The last three months of the year saw a marked increase in volatility and a substantial fall in risk assets, notably equities. Global equities (as measured by the MSCI world index) fell by 9.5% over the period, with growth focused stocks, such as smaller companies and technology, leading the fall. Markets left it late in the day for a year-end rally, which saw an almighty one day increase in the Dow Jones on the 26th December, rising by over 1,000 points, leaving equities ending the year on a more positive (albeit volatile) note.

We believe that the most significant factor at work is the swing from global Quantitative Easing to Quantitative Tightening. The financial system was saved by massive credit expansion in 2008 and markets are wilting after a relatively short period of reversal which started in the US, followed steadily by the rest of the major economies. The global financial system is now in a net tightening position.

More headline grabbing factors adding to the climateof apprehension include the apparently insoluble Brexit issue that, if it occurs on a non-negotiated basis, will surely send the UK in to recession as well as having knock on effects in Europe. In the US, President Trump’s vocal criticism of the Fed’s policy action suggests he and his advisers appreciate just how fast the US economy could deteriorate in an aggressive tightening regime. Trump also sees the stock market as a barometer of his success, so that adds to his interjection with the “independent” Fed.
Whether it was Trump’s late night tweets, weakening economic data or sharp correction in equities, Jerome Powell (Fed Chair) appears to be striking a more dovish tone from a formerly aggressive (in the eyes of the market) rate path.

Our focus in the near-term is protecting capital gains and in these circumstances, we have taken a more defensive stance than normal. This includes higher liquidity and exposure to inflation-linked bonds; absolute return funds and an element of Gold as defensive assets. While Gold is deemed a defensive hedge, it really thrives in a period of negative real interest rates, alongside a stable or weakening US dollar. While volatility is painful, we know that in the long run, it creates opportunities and we hope to capitalise on these as and when they present themselves. Further downside in equities in the first quarter would present an opportunity to add selectively to risk assets in portfolios.

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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), utilised 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