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Market View for August 2018

Several factors are worrying investors at the moment and these are generating volatility in share prices.

Outlook

Several factors are concerning investors at the moment and these are generating volatility in share prices. Donald Trump’s threats to impose tariffs on imports, political instability in countries such as Italy, and the prospect of rising interest rates in a number of regions are all having a negative effect on investor confidence and, therefore, share prices.

Surveys of investors indicate that pessimism has been increasing, which could lead to further falls in share prices. When investors think that a given economy is doing well they often prefer investments that benefit from that growth, such as equities. These higher risk-rated investments can offer higher potential returns. But when investors expect growth to slow or reverse then lower-risk rated investments, such as bonds, tend to be more popular.

Growth should support share prices

Despite pessimism in some quarters, our analysis suggests that global growth will continue to strengthen, which should support company profits and share prices. When companies are making more profits, they are more inclined to pay dividends to shareholders, which makes the respective shares more popular with investors.

Furthermore, the recent falls in share prices have made them less expensive and, in our opinion, more likely to rise in value. For these reasons, we continue to prefer equities to bonds.

More positive on emerging markets

Within equity markets, we have become slightly more positive towards emerging markets. Emerging market economies are often growing much more quickly than so-called developed markets (such as the US and the UK), but the former are at more risk of political or economic instability. Investors have been worried that threats by the US government to impose tariffs on Chinese goods would lead to a sharp fall in Chinese economic growth. Because China is such an economic powerhouse, any downturn in growth could have a negative effect on economies, especially those in Asia. However, we think these fears are overdone leading to share prices falling too far. Therefore, we believe that prices could recover in the coming months.

Bonds’ prices under threat

The outlook for government bonds remains clouded by the prospects of higher interest rates. This is because interest-bearing cash savings, for example, are able to increase the return they provide to investors as interest rates rise, while most bonds make a fixed payment to investors regardless of changes in interest rates. The Bank of England raised interest rates in August and further rate rises are expected in the US in the coming months.

For this reason, our outlook for bonds remains negative. This is especially the case in Europe, where the yield offered by some government bonds is very low and in some cases (German government bonds) is close to zero. We also think that corporate bonds (those issued by companies) in most countries are expensive and offer limited returns.

Some parts of property market rising

With Brexit looming, uncertainty as to how the market will be affected by the UK’s departure from the European Union remains. However, high demand for industrial buildings that are used by companies for their e-commerce operations is pushing up prices in this part of the market. By contrast, traditional high street retailers are suffering, leading to falling prices among retail properties.

Important Information

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 August 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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