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Market update: Monetary policy, trade, and what Woodford has taught us, again

Richard Flax, Chief Investment Officer

Monitoring the markets on your behalf, our Asset Allocation Team help you stay one step ahead. Here, Richard Flax discusses how monetary policy and trade tensions have impacted the financial markets, and what recent troubles at Woodford have taught us, again.

At the end of May, markets were focussed on two main areas of concern. The first was around monetary policy; would the Federal Reserve in the US be able to cut rates enough to satisfy some fairly aggressive market expectations? And second, would trade concerns begin to weigh on global growth

As we reach the end of June, we’ve had some reassurance on both counts. 

Firstly, on monetary policy, we’ve seen both the Fed and the ECB indicate that they would be willing to reduce interest rates and loosen policy as needed – which seemed to be enough to satisfy financial markets during the month.

And, secondly, on trade policy, we’ve seen a ratcheting down of the rhetoric following the G20 summit and the signs now are that we could begin to see some progress between the US and China.

What next for monetary policy and trade?

So after a fairly strong performance from equities in June, the question is what next? 

When we think about interest rate policy we’ve seen some positive rhetoric from the Fed in the ECB but no interest rate cuts. The concern here is that the Central Banks don’t move quite as far or as fast as markets currently expect. 

As for trade, the rhetoric and the news flow have been more positive, but we’ve been here before and we know that it doesn’t take much – some changes in commentary, perhaps a change to tariffs – for the outlook to become a little bit more negative. 

And then the other issue to focus on now is really growth. The global growth environment has been a little bit weaker recently and that’s partly underpinned the commentary from the Fed and the ECB in terms of lowering interest rates. 

The danger here is that if the growth outlook starts to deteriorate, investors may start to think a little bit more about corporate profitability and the potential impact on earnings growth.

What Woodford has taught us, again

We’ve had a strong performance from financial markets in June, but we continue to focus on some of the risks that we see in the market. 

One area of attention is centred around market liquidity. We’ve had a few examples in the past couple of weeks, including one where a fund was unable to return cash to its investors when they asked for it

It’s an important reminder, we think, to focus on the broad range of risks when investing, including the possibility that you won’t be able to get your money back for a period of time or at a price that you like in a more difficult market environment. 

When times are good, it’s relatively easy to buy and sell assets, but when things get a little bit tougher, some of that market liquidity can disappear quite quickly. 

At Moneyfarm, we continue to believe that the right course of action for most people is to invest in broadly-diversified, low-cost, liquid, public-market exposure and that’s what we aim to provide.

Why a Best Buy list isn’t advice

‘Best buy’ lists have become a hot topic of conversation as a result of the Woodford saga.

The lists, which are often created by investment platforms, essentially name investments that the author thinks are good to buy. 

This can be a helpful guide for investors. If done properly and by investment experts, it helps narrow down a large universe of options into a small enough list for the end investor to work from. 

However, they do not constitute financial advice, and we believe some investors can end up in the wrong investment for their situation and goals.

It takes a lot of time, money, skill and expertise to manage your investments successfully for your financial situation, which is why we believe advice is so important. 

At Moneyfarm, we use digital advice to match you to investments that are suitable for your financial goals, financial situation and tolerance for risk. It’s just as important that an investor takes enough risk with their investments, as it is to protect them from taking too much. 

By investing in a suitable investment portfolio, we believe you’re more likely to achieve your financial goals as your portfolio is built to reflect your investor profile. 

If you have any questions about the themes in this month’s market update, or you would like to discuss the investment guidance, retirement planning and market insight services our Investment Consultants can provide, please book a call and one of the team will be in touch at a time that is suitable for you. 

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