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October Market Commentary: A Change in the Weather brings a change in markets

Monthly Market Commentary Oct 2018

With October came the first sharp frosts and the darker evenings. The burning heat of this year’s freak summer is now a distant memory. In the investment markets, October also brought the sharpest falls in the FTSE for a year, with a decline of 4.85% over the month. This was not entirely unexpected but falls always hurt – as much psychologically – as in any financial sense. Investors are always more sensitive to the downside than to success. It is one of the key behavioural factors in giving financial advice and why risk profiling is, and will remain, a hot topic.

It’s not Brexit!

We must stress that Parmenion do not see the recent weakness in the FTSE as a vote against Brexit Britain. In fact, in our successful Tactical portfolios we have just decided to go overweight of the UK market, seeing extremely good value in the international businesses listed in our domestic index. By far the largest element of FTSE’s turnover is generated overseas – in fact it is around 80% – which means that FTSE is well hedged against the possible negative impacts of Brexit. The reasons for its recent falls lie abroad, in the prospect of difficulties in the USA, and across the world, in terms of barriers to trade.

Technology, changing the world

In the United States, two factors have become unhelpfully intertwined. A handful of technology driven businesses, Apple, Google, Facebook, Amazon and Netflix, have almost on their own, driven that market to record highs. Why? Because their products and services have changed the way we consume goods, access entertainment and communicate to each other. The resource of ‘big data’ which these businesses have created is actively analysing and predicting our spending behaviour and more. Their income and profits and valuations are reaching staggering levels.

Trump, against the world

At the same time Donald Trump has pumped extra liquidity into the domestic economy by allowing these same transformational businesses to repatriate their vast overseas earnings. Employment and therefore spending are running hot on the back of his further stoking of the economic engine. The Federal Reserve has had to respond with higher interest rates to avoid a hard landing, forcing the markets to assess and reassess whether things will turn down – will it come sooner or later? And then there are the trade wars which Trump looks to have started. Investing sees the continual tussle between valuation, sentiment and liquidity. With the liquidity tap turning off and valuations sky high, sentiment has shifted, for now.

Where is the good news?

It is important not to get anchored on statistics about just one asset class – especially equities which is the most volatile. Advised clients typically hold portfolios of ten or more asset classes which taken all together offer a pattern of diversified returns. We can see this nicely illustrated in the chart below showing the returns of two familiar asset classes, the FTSE-100 and the UK Gilts market, month by month, over the last year. In eight out of twelve months these two asset classes have reacted in opposite directions, pulling back performance on the up side but holding it up when markets have got choppy.

Reassessing lower risk

Parmenion’s portfolios are designed and managed to perform over time and have proven their ability to deliver sequentially increasing return and volatility risk grade by risk grade, for over a decade. But as the rescue measures put in place after the financial crisis get worked out of the system, returns over the next five years or so are not expected to be as strong as we saw when markets recovered from the slump. Our Risk Grade 5 Multi Option portfolios produced a return of 46.9% in the five years to September, for example. This suggests to us that the focus for investors over the next few months will be on whether capital allocated to near term spending is held in portfolios at the right risk grade. Parmenion’s platform fully supports a multi-pot approach in SIPP and ISA, so it is easy to reallocate capital to specific goals. In a rising interest rate environment the attractions of lower risk portfolios for ‘some of the money’ may be worth exploring. Meanwhile the prospects over the longer term, at higher risk, remain as attractive as ever.

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