The start of 2018 saw a lot of dramatic news for investors to digest ranging from continued increases in US interest rates to the opening salvos in a US / China trade war, as well as significant privacy breaches at Facebook, and rising inflation expectations across many major economies.
These events overshadowed continuing evidence of solid economic growth around the world and led stock markets to their worst quarterly performance in two years. This seems odd, as global economic health is likely to support a continued rise in equities – it may just be that it is more exciting to write a headline about bad news than it is to report on continued positive signs. We remain confident that maintaining equity weightings in portfolios, especially at more reasonable valuations in many sectors, will outperform other asset classes and deliver an attractive return over time.
We believe an underweight position in fixed income is justified as there are a number of potential challenges ahead for bond investors, not least the changing direction of monetary policy and gradual increases in interest rates. A world of higher interest rates is a tougher backdrop for fixed income instruments, and worries over the speed or scale of future rate rises may send further jitters through stock markets too. We consider that selective property investments can help to mitigate equity market risk and financials should perform well in a climate of rising interest rates.
We also remain focused on the risk of a depreciation in Sterling, especially as Brexit negotiations progress; we believe the currency markets will continue to be volatile and so, we maintain a significant proportion of overseas exposure to protect against Sterling weakness.