After a very challenging October, November saw markets moderate slightly further again. However despite another generally negative month for investment returns, we continue to see market volatility being impacted by a range of global issues, making it more challenging when setting investment strategy.
Locally, the news is reasonably positive. A number of companies have held their AGMs and we’ve seen some solid trading numbers through the first part of the 2019 financial year. By and large, the earnings outlook for these companies remains relatively sound.
On the global front, the trade tariff war between the US and China shows no signs of abating. The US have affirmed an additional $200 billion worth of tariffs may be put in place next year, but President Trump has agreed to hold this for 90 days following talks with President Xi at the G20 this week. These challenges on the trade front are permeating into financial markets and are reflected in the overall volatility (and investor anxiety) that we’ve seen across October and November.
The US Federal Reserve is also still on track to raise rates by another 0.25% in December. It will be the fourth rate rise this year, but this isn’t unexpected from our point of view. We expect that the Fed will probably pause rate rises in the early part of 2019 (and then go on hold for a period – possibly as long as 6 months) as the impact of this year’s rate rises go through the US economy. Generally, there is a 6-9 month lag of the impact of official rate rises on an economy.
Looking to Europe, the Brexit deal has now been signed. Whether or not it gets through the UK parliament and is a good deal for Britain remains to be seen. With the UK Parliament voting on the 11th Dec, it looks shaky at best. How this deal will play out in terms of financial markets (with either a ‘yes’ or ‘no’ vote) is something that we won’t start to see until the early part of 2019, and longer depending upon the practical workings of the agreement.
In continental Europe, Italian bonds have risen quite dramatically over the course of the month. Fiscal responsibility hasn’t been on the agenda for Italy for a while but it’s now starting to come back into play. We feel that investment risks have risen across Europe through the second half of 2018 on the back of slower growth and a more challenging political and fiscal environment.
From an Australian investor’s point of view, these global issues are important because they flow into global (and our local) financial markets. These all cause a level of uncertainty and nervousness amongst investors, which ultimately affect investment returns.
Because of the global factors at play, we’re continuing to take some risk out of portfolios. From our perspective, we’re balancing this by also identifying which risks we think are currently mispriced, which we believe will deliver sound investment performance over the short to medium term.
If you have any concerns about the positioning of your portfolio or your investments in general, as always it’s important to speak to your advisor.
Piers Bolger is Chief Investment Officer at Viridian Advisory