Skip navigation Scroll to top
Scroll to top

How should investors react to the recent equity volatility?

09 August 2019

At the start of August equity markets fell sharply, but have stabilised as this week progressed.  Investors may be concerned about the speed and size of the move, but we should remember that markets are still substantially higher than at the start of 2019 and offer attractive returns relative to cash or bonds.

Current state

It had been hoped that US-China talks could lead to progress on trade and an easier stance from the US Federal Reserve (Fed) had helped push equity markets higher. However, last Wednesday, the Fed cut rates but disappointed the market by suggesting this was not the start of a long series of cuts, which caused markets to fall slightly. However the selloff really begun when President Trump escalated the trade dispute with China. Trump announced that the US would put 10% tariffs on an additional $300 billion of goods from September, to which China retaliated by stopping the purchase of US agricultural goods and allowing the yuan to fall relative to the dollar. Manufacturing data in the US and Europe has already been weak and an escalation of the trade war was not good news.  Trump noted the fall in the yuan, labelling it "currency manipulation" and tweeted asking the Fed to take notice. 

One could argue that Trump is deliberately escalating the rhetoric on trade to get the Fed to cut rates. Whilst equities have been going down, government bond markets have been going up. Since Tuesday last week the 10 year US yields have fallen from 2.06% to 1.75%, 10 year gilts are down from 0.63% to 0.52% and in Europe German bund yields have fallen, with even the 30-year having a negative yield.  

The near future

Government bonds now appear to be pricing in a lot of bad news and further central bank easing. Even US equity markets, which traditionally do not have a high dividend payout look attractive relative to bonds. The S&P 500 Index is yielding more than 10-year treasuries.  We should remember that equity markets have come up a long way and after a steep rise, a period of correction should be expected. In the short term, sentiment may take markets lower but we find the dividend yields attractive relative to bonds and we continue to hold a positive long-term view.  As we go through the holiday season into the autumn, we expect volatility to remain high and markets to be sensitive to political shifts. President Trump is aware of the damage a falling stock market can do to his chances of re-election and our central expectation is that some sort of deal will eventually be done with China. 

Sterling based investors and Brexit

Boris Johnson becoming Prime Minister has increased the possibility of a no deal Brexit.  As a result the pound has fallen, benefitting sterling based investors with international exposure offsetting some of the losses in equity markets. The fate of the pound is linked to Brexit progress. However, given the size of the falls since the referendum, the range of potential outcomes is moving towards in a positive direction and hedging some of the dollar currency exposure in portfolios may be sensible. Where Brexit ends up remains uncertain, with an election looking as likely as a hard Brexit or a delay. 

Conclusion

The recent sell off can be seen as a correction in a longer-term positive market where interest rates will remain low. Whereas inflation linked bonds, particularly in the US, are seen as a good balance to some of the risks presented by a trade war. Brexit adds currency volatility to sterling based portfolios and some hedging currency may be appropriate.

 

This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. The subject of the communication is not a regulated investment. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Vestra LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Vestra LLP, employees and associated companies for any direct or consequential loss arising from this document.

LGT Vestra LLP is authorised and regulated by the Financial Conduct Authority (FCA).