Towards the end of the summer, and during September we positioned portfolios 15-20% in cash due to a tightening of the economic cycle.
Since then stock markets around the world have fallen 10% from their recent highs, and so by being adaptable, this has helped protect you from the full effects.
Our cautious style of investing has enabled us to press the pause button, whilst we go through the next few months of uncertainty. We have increased the cash reserve, and so despite market falls, on average portfolio performance is down 2-3% year to date. We have blended out the full impact of recent falls, by taking different positions, and allocating a little more to cash.
Cash is never a long term holding, and with your agreement, will allow us to deploy it strategically in the dips for the longer term. It also provides liquidity for any ad hoc withdrawals or income, and so short term market turbulence, need not affect lifestyle and holidays.
Below I have outlined some more technical details on what we are seeing.
USA v China Trade Tensions – These have been building all year, but recently Trump has upped the rhetoric to extend their scope. This could be political as we are only a few weeks from the US mid-term elections, but it’s beginning to have an effect on China, with their stock market down over 20% this year.
The US Federal Reserve – J Powell the new chairman is raising interest rates and the markets don’t like it. Markets expect a further US interest rate rise in December, but don’t want continued rate rises next year. This is because it takes away the cheap borrowing that markets have used to fuel the recovery. It means the days of cheaper credit and loans are over.
Quantitative Tightening – The money that was pumped into the financial system after 2008, is now being taken back out. This is causing some problems with liquidity and lack of credit to refinance loans. This is known as ‘liquidity risk’ or to put it another way, another type of ‘credit crunch’.
The EU, Brexit, Italy and Merkel – An interesting cocktail of uncertainty where Italy wants to break EU spending rules, Merkel is calling it a day, and of course Brexit, where the next six months will naturally cause some stock market gyrations.
In summary, it is a normal path for markets to self-correct as the economic cycle changes. The US economy continues to do well, and this is a positive, as a broader barometer for long term stock market growth. We are positioned to help you navigate these uncertain waters in the short term, and have kept some cash in reserve to pick up any bargains for the longer term.
Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in 2010, 2013 and 2017.
Following his work on risk reduction strategies, in 2011 he was recognized by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’
Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.
With over 25 years wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.