Had you somehow been fortunate enough to have slept through 2020, you would have awoken to find that global equities had risen by nearly 16% during the year and could be forgiven for thinking that the world economy was in rude health. The reality is, as we are all too aware, altogether different with buoyant markets owing their gains mostly to the monetary and fiscal measures put in place to combat the effects of Covid-19, and partly to an optimism that that this year will be far better for businesses than last. A continuation of loose monetary policy also helped provide positive returns for bonds. Gold benefitted from its safe-haven status and a fear of rising inflation to post a 20% return for the year. Commercial property and Oil suffered steep losses as a direct result of lockdown measures.
Beyond the headline numbers there has been a huge dispersion between the returns in different sectors, with those which benefitted from enforced changes in working and social patterns, e.g. technology and online retail, massively outperforming sectors such as travel and energy. These sectoral differences were reflected in geographical returns, as the tech-heavy US market saw significant gains whilst the UK market, with its exposures to banking and energy stocks, was one of the few markets which lost money during the year.
The announcement of successful vaccine trials during November certainly played a large part in reviving stock market optimism, and though we, like most, hold an expectation that economic activity might be less encumbered by restrictions come springtime, we must acknowledge that our short term economic fate depends on the course of the virus. Beyond this, we must then consider what are the lasting socioeconomic effects of the pandemic and whether such an extraordinary episode in our history might be a catalyst for economic restructuring and refocusing, or might we simply return to something resembling the old norms. These questions are not just interesting, they are important for the medium term prospects of sectors and asset classes, and it would not be too surprising to see similar dispersion in investment returns in the years to come, though not necessarily in the same pattern as seen last year.
Elsewhere, geopolitics continues to influence markets, not least here in the UK where a Brexit deal was announced giving much more certainty about the future trading relationship with the EU. Not all questions have been settled, notably the nature of financial services trade, a key part of the UK economy. Further, the compromise reached to ensure a ‘level playing field’ does not allow for a full stop at the end of the Brexit process. Nonetheless the deal does largely bring to an end a long period of uncertainty for the UK, and obviously avoids the unfavoured no-deal option.
At our January meeting the Investment Committee voted to make changes to our portfolios which move closer to our new strategic asset allocation. These changes include a greater weighting to overseas equities (with some currency hedging), a move away from sovereign debt towards a more diverse range of bond investments, and the complete removal of commercial property funds. Within our tactical positioning we hold the view that what worked well last year may not do so this year, and therefore favour the UK geographically, and have reduced exposure to ‘growth’ stocks.
I hope you find this newsletter interesting and relevant to you, and I would very much welcome any feedback you may have. Please do feel free to get in touch with your thoughts either by phone on 0207 063 4259, or by email on david.baker@mazars.co.uk.
Despite higher interest rates and persistent (though falling) inflation, global equity markets continued to err on the side of optimism as consumer spending remained strong and company earnings were better than expected.
The last quarter of the year saw some relief for investors who had been hit from all sides throughout 2022 as markets rallied on the belief that the economy was perhaps showing enough signs of stress to persuade central banks to consider slowing, and then stopping interest rate rises.
The third quarter of the year saw markets start to second guess central banks’ resolve to raise interest rates in order to combat inflation. Expectations of a change in monetary policy gathered momentum and caused a rally in global equities of over +11% in a five week period. Alas this proved to be a short- lived bear market rally as central banks, led by the US Federal Reserve, signalled their determination to stay the course with rate rises.
Having been absent for decades, the return of inflation is forcing market analysts to learn how to respond to rising interest rates and squeezes on the real purchasing power of consumers’ disposable income. As interest rates rise, the notion of ‘There Is No Alternative’ is diluted, and the prospects for a slowing economy increase, leaving valuations on risk assets vulnerable despite the recent falls.
The new year brought about a significant change of market sentiment as concerns about inflation and fundamental changes to monetary policy caused a reassessment of asset prices. The war in Ukraine has added to inflationary pressures particularly in commodity markets, as further disruption is expected in supply chains as China announces further lockdowns.
In no surprise to anyone, Covid-19 remained at the epicentre of all matters economic, and the emergence of the highly transmissible Omicron variant forced governments and public health officials to reassess the speed at which normal daily life can resume.
This quarter we consider the UK’s rising inflation and gas prices, look at how the shortage of workers is adding to inflationary pressures, and review the funds we use to invest in US Small Cap stocks.
'Work' may never be the same after the pandemic. How might things play out? What do businesses need to know to prepare? Read our quarterly economic update
Investing during the past twelve years has been underpinned by a basic principle: market participants have been encouraged to take risks, mainly to offset the trust shock that came with the 2008 financial crisis (GFC). Each time equity prices have fallen significantly, the Federal Reserve, the world’s de facto central bank, would suggest an increase in money printing, or actually go ahead with it if volatility persisted. Bond prices, meanwhile, kept going up, as central banks and pension funds were all too happy to relieve private investors of their bond holdings even at negative yields. Market risk was all but underwritten.
Rising concerns for the prospects of inflation dominated the first quarter of 2021 and caused bond market yields to rise in both the US and the UK. As a result, US treasuries lost over -5% of their value (in Sterling terms) during the period, whilst the loss on gilts was even greater at just shy […]
Inflation expectations rising scared lethargic bond markets and became the most contentious subject of debate in the first three months of the year. Read our outlook to find our position on inflation and the impact on risk assets
Quarterly Investment Outlook Q1 2021
The persistent dichotomy between stock market performance and economic performance has been a particularly hard puzzle for investors. While it is very clear that the previous 12-year economic cycle has undoubtedly come at an end, the financial cycle, thanks to central banks, has survived a five standard-deviation event (1 in 3.5 million probability), and continues unabated. With the global economy in turmoil, can stock and bonds be trusted to create or even maintain wealth?
Global stock markets built on the astonishing rebound from the Spring to post further, albeit more modest, gains during the third quarter of the year. Global stocks rose by nearly 5% in Sterling terms. That said, again the rises were far from uniform geographically, with US and Japanese equities posting strong returns whilst Europe struggled to a marginal positive return and UK equities lost further ground. Aside from Equities, Gold started the quarter strongly, but then sold off in early August as safe haven assets including the US Dollar retracted in less volatile markets.
A quarterly report is not normally a difficult document to put together. Usually it consists of an account of the trending state of affairs, the more possible outcomes and risks to those outcomes. In the past few years, these reports were actually made easier. The US Federal Reserve was underwriting risk at such an unprecedented scale, nearly unwavering for more than a decade, in a manner which suppressed all major hazards to the economy and financial markets. Ever since 2010 the question, repeatedly, had been: “With opportunity costs driven down so much for so long, whatever can bring markets down?”
Global stock markets staged a remarkable comeback in the second quarter with the MSCI World Index up nearly 20% in Sterling terms. Whilst not recovering all of the losses from the high point in March prior to widespread lockdowns, global equities are nonetheless at higher levels than at the start of the year. Given the absence of any meaningful advances in the treatment of or vaccination for COVID-19 and that the corporate world is temporarily being held together by a variety of hastily created measures of government support, this optimism could be regarded as being somewhat misplaced.
At our Investment Committee meeting in the first week of January we discussed amongst other things the heralded resolution of the trade war between the US and China, the fact that the US Federal Reserve was printing more money, and the renewed optimism that came from a stable government here in the UK. Cautious bullishness on risk assets was the tone of the meeting. Looking back at our discussion documents from that meeting, our ‘Wall of worry’ chart which details the things which we consider to be possibly obstructive to stock market gains, did not even mention coronavirus. In other words, we have experienced a true ‘Black Swan’ event. Global stock markets fell by 20% over the first quarter (around 15% for a Sterling based investor) having lost as much as 32% by mid-March. Gold performed its role as a safe haven rising 12% in Sterling terms, whilst Gilts rose by over 6%.
At our Investment Committee meeting in the first week of January we discussed amongst other things the heralded resolution of the trade war between the US and China, the fact that the US Federal Reserve was printing more money, and the renewed optimism that came from a stable government here in the UK. Cautious bullishness on risk assets was the tone of the meeting. Looking back at our discussion documents from that meeting, our ‘Wall of worry’ chart which details the things which we consider to be possibly obstructive to stock market gains, did not even mention Coronavirus. In other words, we have experienced a true ‘Black Swan’ event. Global stock markets fell by 20% over the first quarter (around 15% for a Sterling based investor) having lost as much as 32% by mid-March. Gold performed its role as a safe haven rising 12% in Sterling terms, whilst Gilts rose by over 6%.
Following a flat third quarter, global equities rallied to the end of the year with the MSCI World index up over 7% in local currency terms. Returns for unhedged Sterling based investors were broadly flat as the Pound strengthened following the Conservative’s decisive general election victory. The late final rally was primarily driven by renewed optimism for a ‘phase one’ trade deal between the US and China, and left global equities up 25% for the year. It is of course important to note that, by contrast, markets ended 2018 in very pessimistic mood as the Fed continued to raise interest rates, and therefore a global equity return figure of around 8% from September 2018 is a more useful measure of equity returns.
Read our Full Quarterly Outlook The Power of the Cycle John Kenneth Galbraith, an irreverent but brilliant economist best known for his work on the Great Crash of 1929, famously lamented about his own profession: “the only function of economic forecasting is to make astrology look respectable”. As always, we toyed with the idea that […]
Read our full MWM Investment Newsletter Winter 2020 Following a flat third quarter, global equities rallied to the end of the year with the MSCI World index up over 7%. Returns for unhedged Sterling based investors were broadly flat as the Pound strengthened following the Conservatives’ decisive general election victory. The late final rally was […]
Read our full MFP Quarterly Investment Outlook Q4 Ghosts of Japan Growth has been consistently slowing across the globe. In the past two issues, we dealt with the impact of China’s slowdown, as the world’s marginal buyer goes through the necessary pains of transformation and the impact of elongated cycles on growth. In this outlook […]
Read our full MWM Investment newsletter Autumn 2019 Equity markets across the world ended the quarter broadly where they began having recovered from a slight loss of confidence during August. This stability came despite no improvement in economic data, and a further fall in government bond yields signalling a cautious economic outlook. In a similar […]
After a decade of unprecedented monetary stimulus, we have failed to see global growth rates anywhere near their pre-crisis levels. At the same time, however, we have not seen a recession. The world seems to be ‘chugging along’ as output is pressured on all sides. So is it the Fed that killed economic cycles? Read our […]
Read our full MWM Newsletter Spring-2019 Global stock markets regained their poise in the first three months of the year returning just under 10% in Sterling terms, and nearly recouping the losses from the final quarter of 2018. These gains were delivered despite continued concerns about economic growth which brought about a fall in sovereign […]
Read our full Mazars Quarterly Investment Outlook- Q1 2019 Outlook 2019 Sometimes it appears that the world is getting louder. The Norwegian Sociologist, John Galtung said that if a newspaper came out once every 50 years, it would not report half a century of celebrity gossip and political scandals but rather momentous global changes such […]
Read our full Mazars Quarterly Investment Outlook – Q4 2018 Global Divergence In an early 2010 report Morgan Stanley warned that the biggest consequence of the 2008 global financial crisis could be isolationism and the reversal of a 50 year old trend which saw increasingly open borders, open trade and freedom of movement. As each […]
Read our full Mazars Quarterly Investment Outlook-Mind the liquidity A cautionary tale There’s an old story about a man who was marooned on a deserted island. Searching for food and water, he instead found a cave hiding a chest of pirate treasure. No water in sight though. He spent his last few days, next to […]
Read our full MWM Quarterly Investment Outlook Q2 2018 The first quarter of 2018 saw a return of market volatility and a reversal of gains from the end of 2017. Despite a strong January, global equities finished the quarter down 2.1% in local currency terms, but 4.7% for UK investors as the Pound continue to […]
The final quarter of 2017 provided investors with further positive returns to cap off an extremely profitable year for equities. Global equities added 5.6% in Sterling terms in the fourth quarter, to bring the full year return to 13.3%. Japanese (11.4%), US (7.0%), and Emerging Market (6.9%) equities were the stand out regions during the […]
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