Quarterly Investment Update Q4 2018

Central banks hold their nerve

Despite opposition from President Trump, the US Federal Reserve (Fed) raised interest rates to a range of 2.25% to 2.5% in December – the fourth hike in 2018. However, Fed officials suggested a softer approach to future increases, focusing on economic data to avoid over-tightening that could damage economic growth.

Elsewhere, the European Central Bank (ECB) confirmed that it is ending its net asset purchase programme. The ECB has stopped its bond-buying scheme, worth €30 billion a month, despite a recent slowdown in the region’s recovery. Although this is a significant move, the bank kept interest rates on hold and we think the possibility of a rate rise in the near future is slim.

In the UK, consumer price inflation fell from 2.4% in October to 2.3% in November, led by lower energy prices. The Bank of England kept interest rates at 0.75% in December, but governor Mark Carney suggested there could be a faster pace of rate increases if the UK managed a smooth exit from the EU.

UK gilts and US Treasuries offered improving returns over the quarter as investors sought the relative security of government bonds in the face of unpredictable equity markets. The yield on America’s 10-year Treasury bonds fell below 3% at the start of December for the first time since September, as bond prices rose.

We see government bonds as offering poor long-term returns but have increased our holdings over 2018 as they provide diversification in volatile conditions. In the meantime, while tightening monetary policy is likely to lead to sharper short-term rises and falls in equity markets, we remain confident in the economic outlook. Given recent market falls, any positive economic data could help investors re-focus on the fundamentals and support equities.

Brexit deadlock

Brexit dominated UK headlines over the final three months of 2018. For investors, the negative sentiment caused by the fluid political landscape weighed particularly on sterling. However, Brexit isn’t a major driver of equity market performance. There are some sector-specific effects on industries such as banking and property, but falls in UK equities more generally appear to be driven by the same factors fuelling falls elsewhere. Indeed, UK equities fared somewhat better than the US and Europe over the quarter.

Consumer confidence in the UK fell to its lowest level in almost a year as Brexit uncertainty continued. The UK economy has slowed but is still growing at an annualised rate above 1%. Unemployment is low and wages are rising at their highest level for almost a decade. Despite some negative headlines and profit warnings, as well as ongoing problems with high-street retailers, company profits have remained buoyant across most sectors.

A slippery slope?

Oil prices struggled to recover after a steep sell-off pushed them to their lowest point of the year, as Brent crude fell below $58 a barrel at one stage. Various factors have resulted in oil prices falling by over a third since early October, including a lingering glut in supplies and American pressure on Saudi Arabia to keep energy costs low.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.