Synopsis of Events
In Q1 we saw a broad market sell off in global markets which was led by the US which caused a ripple effect into other major markets such as the UK and Europe. Whilst the trigger for the sell off in February was non fundamental (Vix etf related) it was a general opinion in the industry that such an event was overdue given the build-up in equity returns over the previous 12 months. The magnitude and incredibly short timeframe in which it occurred was unexpected and caught many by surprise.
The UK Domestic Markets have been facing further difficulty with political instability and Brexit still looming, this combined with the unexpected strength of the British Pound against the US dollar creating an unfortunate situation for UK Equity investors with the majority of assets and securities earnings being derived from overseas. With RPI in the UK touching 3% and inflation increasing globally it has forced Central Banks to review their interest rates which has caused a portion of investors to begin looking at government debt for investment rather than equities. Increasing inflation has not only forced Central Banks to review their rates, Corporations have also been forced to increase their coupon rates to attract investors for debt raises.
Whilst the political landscape has raised some further concerns on broad market valuations the manager has not exited positions. We do not see a change in the company / macro fundamentals so believe that the markets will recover – as a result we are happy to keep the equity weighting. Any further negative Macro/political information points will mean a further review is needed. Since the start of the year the manager has operated its strategy against a benchmark the FTSE Private Investor Balanced Index which measures the expected return of UK retail investors. In Q1 the Manager is 1.4% above the benchmark.
Fixed income may now begin to look as an attractive option for retail investors again but due to the selloff that was seen in Q1 opportunities in equities now look much more attractive than they did in the second half of 2017. Within the UK it finally looks like investors will receive some clarity on Brexit which should allay fears into the deadline in 2019 however longer term political stability is a concern for foreign investors post Brexit. Both will affect the British Pound however we expect that with the clarity to be seen over the course of 2018 this should have a positive effect on the British Pound and the domestic earning securities.
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