The Age of Uncertainty

For many years financial markets have had a very benign backdrop. The era of QE put a floor under bond markets, forward guidance gave certainty over future US interest rates and we had a relatively predictable political order. Combining this with a growing economy and ultra-cheap money, may have given rise to a huge degree of complacency in financial markets, or irrational exuberance as it was once termed.

It feels like this era has now ended and the cynics are in the driving seat once again. Credit spreads are again on the rise, the yield curve is flattening, and equities are having a torrid time. Arguably, we have been building toward this for some time with some equity markets peaking towards the start of the year, while the high growth technology stocks continued to make new highs. Now even this area of the market seems to have taken a significant turn to the worse, leading to the situation where 90% of asset classes have lost money this year. Not a pretty picture and a very difficult environment to construct a diversified multi asset portfolio.

% Negative total returns across asset classes

Sources: Deutsche Bank; Bloomberg Finance LP; GFD.
Note: Returns are in US dollars. Data for 2018 are as of mid-November.

A good sense for the tone of markets can be seen from their reaction to recent ‘news flow’. A slightly more dovish signal from Fed Chair Powell, implying that rates were close to neutral and future moves would be data dependent, rather than rigidly following the forward guidance. While the initial reaction was positive, the market subsequently has decided this news increases uncertainty and therefore, is negative after all. A year ago, this statement would have been taken as unambiguously positive. Similarly, the positive noise on China-US trade negotiations initially led to a huge rally, but this was quickly erased as market participants decided that there was not enough detail.

In this environment, we feel it is not a time to take aggressive positions and, in particular, to avoid situations which require a high degree of confidence to support their valuations. We prefer areas supported by hard assets and cash flow in preference to high debt levels or belief in the future. This has led us to sell most of our remaining ‘growth’ positions, we already had very few situations with high debt burdens, outside of utilities and infrastructure. Looking ahead we would look to a much more settled tone and a clearer outlook before putting significant amounts of risk back into portfolios.

 

Risks:

The value of stock market investments will fluctuate and investors may not get back the original amount invested.

Past performance is not a guide to future performance.

Forecasts are not reliable indicators of future performance.

 


Important Information:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Source for information: Miton as at 05/12/2018 unless otherwise stated.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice.

Miton has used all reasonable efforts to ensure the accuracy of the information contained in the communication, however some information and statistical data has been obtained from external sources. Whilst Miton believes these sources to be reliable, Miton cannot guarantee the reliability, completeness or accuracy of the content or provide a warrantee.

Issued by Miton, a trading name of Miton Asset Management Limited the Investment Manager of the Fund which is authorised and regulated by the Financial Conduct Authority and is registered in England No. 1949322 with its registered office at 6th Floor, Paternoster House, 65 St Paul’s Churchyard, London, EC4M 8AB.

MFP18/470.