We have of course been following developments and any potential impact on financial markets. At this point, it is worth highlighting the analysis we published in October, with a decision tree for how we saw the process unfolding. UK financial assets have behaved similarly to how we expected. Consequently, there has not (yet) been any negative ‘Brexit impact’ on client portfolios.
We are currently reviewing the decision tree, incorporating any new paths we believe are likely while also updating our expectations for financial assets. This may result in a change to portfolio positioning going forward.
As reported in our Q4 2018 Market View, we had already balanced UK equities in client portfolios across company size, industrial sectors and the financial profiles of companies to avoid portfolios lurching in one direction or another solely due to Brexit risks.
Nonetheless, portfolios are down versus where they were at the end of September 2018. So, if it isn’t Brexit, what has been driving market volatility?
The last three months of 2018 were turbulent ones with global equity markets having dropped almost lock-step to the same degree, around 15%. The market moves were driven by a combination of factors: the removal of monetary policy support from the US and European central banks, together with the continued trade frictions between the US and China.
It is the latter in particular that lead to an overall slowdown in economic growth from 3.9% to 3.7% according to the International Monetary Fund. Based on our assessment of developed market economic activity, the final result for 2018 may transpire to have been lower still, but the point is that the global economy is still growing. It just slowed down a bit.
This change in growth forecast, that may as well be a rounding error, does not marry with the aggressive nature of the market sell-off. This leads us to believe the bigger influencing factor has been the removal of monetary support.
The start of 2019 has seen some easing of tension on both these fronts. The US and China have re-opened trade talks, whilst the chairman of the US Federal Reserve has expressed a more dovish tone saying the Fed will be patient with monetary policy. The president of the European Central Bank has also said that softening economic growth underscores the need for monetary stimulus. The MSCI World equity index of developed markets is consequently up around 10% (8% in GBP) from the lows reached at Christmas.
In a recent article, I noted that the level of volatility to which we have become accustomed in recent years was abnormal. Looking through the long lens of history, 2017 was a remarkably calm year and 2018 was closer to what we would normally expect in terms of the proportion of days with larger moves in equity markets. We do not expect market volatility to recede to the low levels of 2017 and so we must all become accustomed to larger changes in value of portfolios.
We are constantly reviewing the macro environment and are of course tuned in to the alternative, more sinister, scenario of a global downturn. We will make further changes to portfolios when we believe it is right to do so.