Market Briefing - 11/10/2018 - Equilibrium

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    Market Briefing – 11/10/2018

    Market Briefing – 11 October 2018

    Colin Lawson, Founder

    Market Mayhem

    Over the last week, global stock markets have started to fall and no doubt the news headlines will be sensational!

    We therefore wanted to update our clients as to what’s happened, why it’s happening, what we are doing about it, how portfolios are holding up and what might be in store over the weeks and months ahead.

    However, before we get into the detail I would like to explain some of the normal market parameters. In most years the FTSE 100 will lose at least 10% from peak to trough at some point. Roughly every 5 years it will lose more than 20%. These events are therefore part of normal market cycles with extreme events like the credit crunch, the 1970s oil crisis and the Great Depression happening on average every 40 to 50 years.

    The drops we are currently seeing are perfectly normal and not anything to be alarmed about. We have been saying for some time that we expected volatility to return, so we are not at all surprised that it’s here.

    What’s happened?

    At the time of writing the FTSE 100 has fallen from its 52-week high of 7,903 to 7,006 at the close of FTSE today (11 October 2018) representing a drop of over 10%. In our opinion, this means that the market is now suffering a “correction”, which is the second one this year. Markets worldwide are suffering significant losses with Chinese and Hong Kong markets down around 25% and, whilst America has done well so far this year, even it is not immune to this latest sell off. For example, the Nasdaq suffered its worst day in 7 years losing 4%, and the market as a whole suffering its longest losing streak since Trump was elected.


    Why is it happening?

    We believe there are 4 key areas of concern and it may surprise you that Brexit is not one of them. They are:-

    1. The US Federal Reserve (The Fed) has been raising interest rates of late which affects borrowing costs for its citizens and companies. It also has a global impact as many emerging market countries have borrowed money in dollars.
    2. The Fed has also begun to slowly unwind the quantitative easing (QE) program that has helped support markets for so long.
    3. The US (Trump) driven trade war is starting to impact on companies’ profitability as raw material prices start to rise and China enforces its customs rules more strictly.
    4. Italian government debt stands at a 130% of GDP and their published budget seems it will break EU spending rules. This leads to fears that it could ultimately fail to repay its borrowers.

    So, we have a number of factors at play, however the most important is probably the rising interest rates and the unwinding of QE. These are causing the dollar to strengthen and leading money managers to sell equities which no longer look as attractive relative to bonds.

    It is no coincidence that the low point of the credit crunch in March 2009 coincided with the launch of QE. The market has been propped up since by low interest rates and unprecedented money printing, so we shouldn’t be surprised that its withdrawal causes some market wobbles.

    Trumps policies of “America First” may be causing problems elsewhere in the world, which may well come back to haunt him! In true Trump fashion he has shifted the blame for the current Stockmarket falls firmly on the Fed calling them “Loco” and saying in a Fox news interview “The problem I have is with the Fed, the Fed is going wild. They’re raising interest rates and it’s ridiculous”.

    I have never heard of a sitting political leader referring to its own central bank in such terms.


    What are Equilibrium doing about it?

    Our portfolios have been relatively cautiously positioned going into this sell off which has so far served us well.

    We had triggers in place to take certain action if markets started to fall. The first was to buy a new Defined returns product from JP Morgan at a FTSE level of 7318.

    This was followed up with the purchase of a FTSE 100 tracker earlier this week, when the FTSE was around 7,200, this increased equity holdings by 3% for all of our portfolios. This is a short term “volatility trade” which we will aim to sell at around 7,550.

    Having previously reduced equities at higher levels and having been patient when an earlier defined return matured at a higher level, it makes perfect sense to top up both during this sell off.

    How have portfolios held up?

    In short, as expected.

    It’s impossible to continue to make money when all the world around you is falling, our aim is to limit the downside and take advantage of it at appropriate times.

    Our balanced portfolio as of yesterday’s close was down around 2.5% from its 52-week high. This compares to a loss on the FTSE of 7.9% (after dividends reinvested). In other words, we have suffered only a third of the fall which is entirely in line with our predictions and the FE Analytics risk scores we use to monitor risk.

    This trend is reinforced when we look at returns over the last 3 months where the FTSE has lost just over 6% and our balanced just over 2%.

    What might be in store over the weeks or months ahead?

    We are possibly at the bottom of a 10% correction, we might be approaching the halfway point of a 20% plus market crash, or something else! Now I appreciate that this information is not particularly helpful, but it is honest, unfortunately there is no way to tell.

    The earnings reporting season is due to start for US companies, if this comes in with some strong numbers, if global GDP remains strong, if asset allocators start to believe markets now represent good value and start buying on mass then the chances are that this dip could be short lived and it will be recorded as a normal correction.


    If asset allocators continue to sell equities, if US earnings and forecasts are hurt by the trade war, if Italian fears grow then we could be heading for a long overdue fall of 20% or more for stock markets. In US terms this is the longest bull market in history having lasted for 3503 days. Since Trump was elected it has seen an incredible 102 all time highs.

    We are planning for further volatility trades should the FTSE reach 6,750, this will increase our equity allocation in portfolios by 3%. Should it continue to fall further we will look to make a more major shift if global markets approach the 20% loss mark.

    Whatever the outcome please rest assured that this is perfectly normal and there should be no reason for any of our clients to be in any way concerned.

    Upcoming client briefing

    If you would like to know more about our thoughts and portfolio positioning then why not come to one of our client briefings. The next one is on Thursday 25 October, you can book your place by clicking here.

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