October was a difficult month for equity markets, and global markets fell up to 6% as concerns over US interest rates, trade tensions and the possibility of weaker economic growth intensifying and transforming investor risk appetite.
Has Moneyfarm’s view of US equity changed?
The market sell-off came in the middle of the US earnings season. So far, those earnings have come in pretty well. US companies have continued to show good profit growth, ahead of where most analysts expected.
The concern is that US earnings growth over the next couple of quarters won’t maintain the strong momentum we’ve seen in the past. In response, we’ve seen analysts downgrades their expectations for the next three-six months. That’s not something to be too concerned about, but it has weighed on short-term sentiment.
US monetary policy
US policy makers are having a tough time. On the one hand they don’t want inflation to get out of control, but they also want to keep economic growth relatively strong. That tension was reflected in some of the market volatility we saw in October.
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There’s a concern US policy makers might tighten monetary policy too aggressively in 2019 and cut off economic growth. Our view is that policy makers will probably get it just about right. Hike rates enough so that inflation doesn’t get out of control, but still keep economic growth relatively decent.
How portfolios are positioned ahead of Brexit
The negotiations around Brexit seem to be making some slow painful progress and the probability of an agreement seems to have increased. Now, whether that agreement can pass muster in parliament remains an open question, but we’d argue that any progress is likely to be taken positively by UK assets.
What does that mean for portfolios? Well in the latest rebalancing we’ve increased the weight of sterling in our portfolios, which as you know are generally globally diversified. That means that we’re trying to hedge against the possibility that sterling will increase in value quite sharply as the result of an agreement. That’s just part of the risk management process that we continually go through when we manage these portfolios.