Market Commentary - June 2019
21st June 2019
Markets paused for breath in May following a strong start to the year – the MSCI World index was down 5.6% for the month, driven predominantly by weakness in the US. The NASDAQ index, which tracks mostly technology companies, fell 7.9%. The saying goes ‘Sell in May and go away’ – meaning the summer months do not typically present the best return profile for investors – with winter proving far more fruitful. Sterling weakness against the dollar dampened the effect of negative international equity returns for UK based investors.
The volatility came as President Trump ratcheted up trade war tensions following claims that China was going back on some of its promises regarding intellectual property protection and other important issues. Face-to-face negotiations have stalled and attention will turn to the G20 meeting later in June to see if the two sides can reignite conversation. What is clear is that tariffs are beginning to influence global growth. Early in June, the US central bank said it would act to sustain the current economic expansion – the markets took this to mean a rate cut, or two – by the end of the year and equities have rallied accordingly.
Our view remains that Trump cannot afford to begin his re-election campaign without an economy firing on all cylinders – something that would be aided by a deal with China.
Elsewhere, bond yields – which move in the opposite direction to bonds’ value – have continued to move lower in 2019. Many developed markets’ government debt pays a return lower than the level of inflation, meaning investors will lose money if held to maturity.
Apart from their diversification benefits, why has so much money flowed into bonds this year? One theory is that baby boomers themselves are to blame. Investment lore dictates that you gradually move from equities to bonds as you approach retirement. We think this approach is outdated, particularly following pension reforms in the UK (two-thirds of investors now opt for drawdown and their money may need to continue working for them for another 30 years). But traditions die hard, and with so many baby boomers approaching retirement, tidal waves of money are crashing in the direction of treasuries.
Another thought is that many in the market are seeking the perceived safety that bonds represent, with their fixed – albeit negative – returns. The main problem with bonds is that value is destroyed with inflation and interest rate rises. With bond yields so low and prices so high – there appears to be little upside benefit or indeed downside protection for a bond investor. Equity investments on the other hand may be more volatile but provide a better long-term return profile. Rather than taking a guaranteed loss on a government bond currently, at least equity investors can hope for a more positive outcome.
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