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Policy U-turns and V-shaped recoveries

Tom Stevenson

Tom Stevenson - Investment Director

This week, we published our new Investment Outlook. In it, we set out our latest thinking about financial markets after a remarkable three months in which sentiment has recovered from the mid-winter blues with which we began the year.

The recovery in markets since Christmas has been dramatic - a classic V-shaped rally that has clawed back almost all the ground that was lost in the slide that marred the fourth quarter of 2018.

It’s actually been an unusual market recovery because it has seen positive returns for both shares and bonds. Typically, the two main asset classes move in opposite directions but in recent weeks investors have been happy to hold both in their portfolios. Stock markets have focused on growth while bond investors fretted about a looming slowdown and sheltered in the safe haven of fixed income.

One of these two types of investor must be wrong, but for now no-one is complaining.

Markets have been driven by three main trends or themes so far this year. The first is broadly negative - the ongoing uncertainty of Brexit. One is a positive - the change of tack by the Federal Reserve. The last is a negative with some positive light at the end of the tunnel - the US/China trade war.

It is the combination of these three that has resulted in a market rally that seemingly lacks much conviction. Shares and bonds are higher but there’s a definite lack of euphoria among investors. The market feels a less obvious buy than it did three months ago but no-one seems worried about an imminent reversal either.

Our Investment Outlook analyses the four main asset classes and five key regional stock markets. Here’s a summary of our findings (for more detail on all of these, visit our Outlook microsite).

  • Shares: most markets have reversed the fourth quarter slide, but further progress will depend on earnings outperforming subdued expectations as we head into the first quarter results season.
  • Bonds: we are also neutral on fixed income investments after the slide in yields during the first three months of 2019. To justify today’s low income from bonds, the economy will have to deteriorate from here, but fixed income continues to offer good diversification to a portfolio.
  • Property: there’s a real mismatch between slowing economies and still strong demand for real estate. The yields on offer in the hottest markets just don’t repay the risks.
  • Commodities: the most important of these, oil, has enjoyed an even better three months than the best stock markets. Supply is under pressure in key countries like Libya, Iran and Venezuela, but the US President is chasing re-election so expect the pressure to mount on Saudi Arabia to boost production and put a lid on the oil price.
  • US shares: after the New Year rally, the risk/reward balance is less attractive than it was at Christmas. The Fed needs to stay accommodative to keep shares at today’s levels.
  • UK shares: Brexit is as hard to call as ever, but the uncertainty is priced into the out-of-favour UK stock market. Any resolution and the shares could rise from here.
  • European shares: One of the most interesting contrarian investment opportunities today. Compared with other stock markets, and rival assets like bonds and cash, European shares are as cheap as they have been in years if not decades.
  • Japanese shares: another cheap market but one with a vulnerability to any deterioration in the global trade situation. There are positives, however, with strong inbound tourism and buoyant consumer confidence on the back of a tight jobs market.
  • Asia Pacific shares: the scale of the rally in Chinese shares makes it hard to chase the Shanghai and Shenzhen markets too hard. India, too, recently hit a new high. A resolution of the trade war is required to justify today’s levels.

So, as ever, it’s a mixed bag in global markets. There are plenty of things to worry about, but policy is supportive and valuations not demanding in most markets.

As well as our latest thinking on different regions and asset classes, the Investment Outlook points investors towards our favourite funds. These are not personal recommendations, of course, but hopefully they will help investors to put together investment portfolios that will meet their needs.

If you want to watch me talking through the Outlook and answering questions from other investors, you can do this on our dedicated pages too.

Watch the Outlook webcast and download the report.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.