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Could equity be a surprise safe-haven?

Every time half term rolls around it brings the same challenges. How a parent keeps their children entertained and stimulated seems to lead to the same list of choices; a museum, the cinema, educational games, perhaps a holiday further afield. Yet when broaching the topic with your children that are four years apart in age nothing seems inspiring.

Enough of Trump and Brexit

Lately I feel like the news reel is giving me those limited, uninspiring, half term messages again and again. For months I’ve been reading about Trump’s taunting and Brexit’s beatings and the articles just seem to play on a loop with no end to the story. It’s as if I’ve woken up every day on Groundhog Day.

One would be forgiven for thinking that this level of uncertainty would be reflected in the markets. It’s been engrained in us to think that uncertainty feeds volatility. But on closer inspection this is politics, with its news cycles, its policy announcements, with governments that first fight and then return as friends. And the markets? How do they react to this new rhetoric? The main risk indices, such as volatility, are low and the the worlds equity markets continue to rise. How is this possible in an uncertain climate?

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Strong markets

This is something of a mystery. Perhaps the markets, just like me, have decided to turn away from all the noise and instead focus on the known unknowns. Perhaps this is one of the more reassuring explanations that gives one a sense of sanity.

Another possibility could be that markets are starting to question the key risk indicators. Historically we’ve assumed that equity is riskier than bonds. But in a world of low interest rates and rising inflation, it’s not clear that government bonds are a particular safe-haven. Historically, equities have provided a some measure protection from moderate inflation. So maybe the appetite for equities reflects a lack of alternatives and a belief that sovereign bonds might guarantee you a negative return, after-inflation, while equities at least gives you the chance to grow your wealth.

Maintain a focus on the long term

What does all this mean for investments? The world is uncertain and valuations are above their long-term averages. With that in mind, maybe the best option is, if possible, to look beyond the short-term noise and maintain a long-term approach to investing. So next week, I’ll be turning to the museums, in the hope that a different approach to education for a week will mean my children are well-equipped to face whatever world they grow up in.

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