Investing’s unholy trinity

Tom Stevenson

Tom Stevenson - Fidelity Personal Investing

There are three things that matter to investors in the UK today: where next for US interest rates; can America and China kiss and make up on trade; and when and how will Brexit finally resolve itself.

Thursday brings news on market’s three key questions

In the past 24 hours there has been important news on all three fronts.

The Federal Reserve

The turnaround in markets around Christmas was very largely a consequence of the Fed’s change of heart on US monetary policy. Having told the market it was minded to keep tightening in December, by January the US central bank had staged a massive swing the other way.

From an expected four rate hikes in 2019, to quickly take American interest rates back up to a more ‘normal’ level, expectations were reined in to just a couple of quarter point rises. Now, even that looks way too ambitious.

Last night, Fed chair Jerome Powell made it clear that there probably won’t be any US rate hikes this year and maybe just one next year. As importantly, the programme of returning the $4.5trn of bonds acquired during the central bank’s quantitative easing phase is now on hold.

This is both good and bad news for investors. It is a positive because lower for longer rates keeps the cost of borrowing for both consumers and businesses down. Markets like cheap money. However, the signal it sends about the likelihood of a downturn, or even recession, is worrying.

After ten years of expansion following the financial crisis, it was inevitable that the cycle would end at some point. But the reality of the next retrenchment is always going to be a challenge for the markets.

US/China trade

The second big cloud hanging over global stock markets is the new Cold War on trade between the world’s two largest economies. President Trump sees himself as the consummate deal-maker, so he is most at home glowering over the negotiating table.

You can sense his enjoyment of the tense stand-off as he waves the stick of 25% import tariffs at his rival President Xi Jinping. That’s clear, too, in the rhetoric he has employed this week as he warns that existing tariffs might stay in place for a considerable time just to make sure that China lives by the promises it is being forced to make.

It’s a patronising and dangerous approach that could easily blow up in the President’s face. The future of the global trading system hangs on the ongoing trade negotiations, which he breezily describes as ‘coming along nicely’.

American trade negotiators under Robert Lighthizer - ‘our top man’, says Trump - are heading to Beijing next week to try to thrash out a deal. That will cover an ambitious waterfront - a trade deal, existing tariffs, the amount China will undertake to buy from America, industrial subsidies and intellectual property protection.

If it were just about this long shopping list, that would be difficult enough, but this is a bigger battle for global domination. We should not hold our breath for a quick and easy deal, however confident Mr Trump is sounding. But if a deal is struck then expect markets to rally.

Brexit

Which just leaves the little matter of Britain’s relationship with Europe. This appalling situation really does look like it is going to the wire. Prime Minister May has painted herself into a corner and the EU is in no mood to help her out. Unbelievably, with just eight days to go until the scheduled date of our departure, literally no-one has the foggiest idea how this will end.

Having told parliament that she would go to Brussels to ask for a long extension to the Article 50 process if MPs failed to approve her withdrawal deal, the Prime Minister has gone back on that promise and this week written to the EU asking for a short extension until the end of June.

Unsurprisingly, the EU has said that it cannot grant that without MPs’ approval of the deal. Even with it, the timetable is tight. Without it, pushing through the necessary legislation to leave will be impossible.

So, now we seem to have three options: MPs can vote next week to approve the deal; or we can crash out next Friday without a deal; or parliament can somehow step in to prevent what most (but not all) observers think would be a disastrous outcome.

What is extraordinary is the market’s sang froid. Investors continue to behave as if a deus ex machina will swoop down at the 11th hour to make everything good again.

We must hope they are right.

The tax-man cometh

Meanwhile, you are probably wondering what to do with this year’s ISA and SIPP allowances. You would be forgiven for wondering if this is the right moment to invest. It is what we are all thinking.

But it is the wrong question. Fortunately, investors have a full range of options to take advantage of the generous annual allowances on offer. First, you can take the view that a well-diversified portfolio of investments will in due course see you through the inevitable ups and downs of the market cycle. History has shown this to be a sensible approach and the best way to do this in my opinion would be to invest in a broad-based global equity fund such as the Rathbone Global Opportunities Fund or a safety-minded global income fund like the Fidelity Global Dividend Fund.

Second, you could accept that you don’t know where markets are headed and opt for an even more cautious approach by investing in an all-terrain fund split between shares and bonds. A popular choice this tax-year-end is the Fidelity Select 50 Balanced Fund which aims to deliver long-term growth with minimal short-term volatility thanks to its even split between higher-risk shares and lower risk fixed income investments.

Finally, you can simply add cash to your account and wait for the dust to settle a bit. We don’t believe market timing is a viable approach for most investors, but it is certainly a far better option than missing out on your ISA and SIPP allowances.

Remember, use them or lose them.

Find out more about Tom’s ISA picks

Important information

The value of investments can go down as well as up so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular product, service or course of action. If you are in any doubt we recommend that you seek advice from an authorised financial adviser.