After the sharp fall in share prices at the start of February, we took the view that prices would recover. In financial markets there is often a tendency for investors to overreact to both good and bad news.
We think that some shares’ prices fell further than was justified especially with company profits likely to continue growing boosted by strong global economic growth.
However, we are aware that there are risks of further periods of volatility. Investors remain concerned about central banks (such as the Bank of England and the US Federal Reserve) raising interest rates in order to prevent inflation. Higher rates make borrowing more expensive which tends to reduce spending and business investment.
But while the rate of economic growth might slow as a result of rate rises, we think there will be sufficient strength for companies to continue growing profits, which is what underpins share prices.
Stock prices are likely to move up and down much more than they have over the past couple of years as different political, economic and financial forces take effect.
But this can present opportunities to invest when falls in share prices improve their attractiveness.
Bond prices have been just as volatile as equities, which is something we anticipated. Prices have been close to record highs (and yields near record lows) for some time, which is why we had a negative outlook for the asset class.
Investors are likely to be keeping a particularly watchful eye on the US government bond market. Any surprise increase in inflation, or an increase in one of the factors that cause higher inflation, such as wage rises, could lead to another sell-off in bonds. Rising inflation is bad for bond prices, as it reduces the amount that can be bought with the fixed level of income that bonds provide over time.
The advantage of diversifying holdings into commercial property has been demonstrated during the recent period of equity and bond volatility. While equities and bonds prices have been volatile, property valuations have continued to rise steadily.
While there are concerns about the consequences of Brexit, for the time being demand for UK commercial property is being sustained by two main factors.
First, foreign investors are finding it cheaper to buy UK property following the fall in the value of the pound against other major global currencies.
Second, demand for industrial properties continues to support prices. Rental growth in this area of the market is above long-term averages and is expected to remain so. The shift to online shopping is driving demand for properties, including warehouses and delivery depots, especially in urban areas where limited land restricts supply.
For these reasons we are happy maintaining a neutral position towards property for the time being.
Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at March 2018. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
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