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An unpleasant month

Date: 29/10/2018
Category:

Well it has been a really unpleasant month for equity investors.  Global equities have fallen by some 10% over the last month, leaving them over 4% lower over the last year.  Are such parlous markets unusual?  Perhaps the scale and speed of the move were a bit more than one might have anticipated but such drawdowns do occur.  From our perspective, what was surprising was that there was no external trigger, nor was it accompanied by a rally in the prices of government bonds.  But if there was no external trigger, then why the sudden sell off?

We think there were two factors at play.  The first is something that we have been flagging for some time.  To be honest, we probably started flagging it a bit too early but better to be early than late.  It is the recognition that prospective returns are going to be lower and that risks are higher than has been the case over the length of the current bull market.  We feel that this pull back reflected a rebalancing of expectations.  We also feel this is a good thing.  Unrealistic expectations can lead to excessive upward moves and exacerbate the impact of a return to rationality.

The second thing we think was at play is a growing realisation that the US Federal Reserve is going to keep on raising interest rates.  Again, in itself, this is not a bad thing as the intention is to control inflation and stop the US economy overheating.  But it is just this rise in US interest rates that has killed off previous business cycles and led, ultimately to recessions.  It is the recognition of this that we think has added to the sense that risks are higher and returns likely to be lower.  It is the recognition that the end of the cycle is looming on the horizon.

So do we panic?  No.  Equity valuations are now some 20% lower than when markets hit their highs last May and so we would actually be rebalancing and topping up positions.  With the global economy still in reasonable shape that is something we feel comfortable with.  But we would do so in the clear knowledge of where we are in the cycle and that fear of the next recession is likely to trigger a far more painful correction.  We have de-risked and, as we have said before, this is a stage along a journey.  If we see more signs along the road that lead us to feel more cautious we shall have no hesitation in de-risking further.

Regulatory notice

This message may contain information that is confidential or privileged. If you are not the intended recipient, please advise the sender immediately and delete this message. KW, KW Wealth, KW Protect, KW Wellbeing, KW Institutional, KW Partner and KW Private Office are trading names of KW Wealth Planning Limited (registered number 01265376), KW Investment Management Limited (registered number 06931664 ) and KW Trading Services Limited (registered number 03109469) which is a member of the London Stock Exchange.  Each of these companies is authorised and regulated by the Financial Conduct Authority and has its registered office at 13 Austin Friars London EC2N 2HE. KW investment Management Limited is also regulated in South Africa by Financial Sector Conduct Authority.  All these companies are wholly owned subsidiaries of Kingswood Holdings Limited (registered number 42316) which is incorporated in Guernsey with registered office at Regency Court, Glategny Esplanade, St Peter Port, Guernsey, GY1 1WW.

Risk warnings

This message is not to be construed as a solicitation or offer to buy or sell securities and does not in any way constitute investment advice, nor should it be used as the basis for any investment decision. The information contained in this message has been prepared using all reasonable care. However, it is not guaranteed as to its accuracy, and it is published solely for information purposes. Our opinions are subject to change without notice and we are not under any obligation to update or keep this information current. The investments discussed in this message may not be suitable for all investors. KW Wealth does not guarantee the performance of any investments.  Past performance is not necessarily a guide to future performance. The value of investments may go up or down and you may not get back the amount you have invested. The income from an investment is not fixed and may fluctuate. The value of an investment involving exposure to foreign currencies can be affected by exchange rate movements which may cause the value of the investment to go up or down. KW Wealth and/or its affiliated companies and/or their employees may, from time to time, hold shares or holdings in the securities discussed in this message and may as agent buy or sell those securities.

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The value of investments and any income from them can fall and you may get back less than you invested. KW, KW Wealth, KW Protect, KW Wellbeing, KW Institutional, KW Partner and KW Private Office are trading names of KW Wealth Planning Limited (registered number 01265376), KW Investment Management Limited (registered number 06931664 ) and KW Trading Services Limited (registered number 03109469) which is a member of the London Stock Exchange. Each of these companies is authorised and regulated by the Financial Conduct Authority and has its registered office at 13 Austin Friars London EC2N 2HE. KW investment Management Limited is also regulated in South Africa by Financial Sector Conduct Authority. All these companies are wholly owned subsidiaries of Kingswood Holdings Limited (registered number 42316) which is incorporated in Guernsey with registered office at Regency Court, Glategny Esplanade, St Peter Port, Guernsey, GY1 1WW.