Investment Note

Market Insights 2018


TAM kicks off our brand new 'Through the Lens' video series with a message from our senior investment manager, James Penny. James talks to us about October's unprecedented market volatility, investments in which he is seeing great value but also those he will be avoiding, and of course - Brexit, and what this means for UK investing.

After the volatility we saw in October investors would be forgiven for thinking markets were long overdue a respite from the assault of disruptive headlines. Indeed, Trump seemed to give us just that when he announced a new desire to strike a trade deal with China last week.

Earlier this month in a note to clients, TAM's CEO alluded to the return of volatility and extolled the virtues of owning a defensive investment strategy in these uncertain times. Well, since then markets have been unable to shrug off a sense of gloom, forcing capital markets deeper into negative territory to the point that we want to revisit the topic of volatility and shine a light on what’s behind this sell-off and where we might be going from here.

Markets have taken an unfamiliar tumble based on news that is not really any different than that pervading over the past 3-4 months. So why now, and how serious is it? 

Looking at how far we have come since 2008 and the financial crisis, is nothing short of jaw dropping. Despite this being touted as the most “hated bull market in history”, the gains in core markets have been extraordinary since the crisis lows of 2008/2009. The S&P 500 has outperformed the FTSE 100, but for the first time we are now seeing real synchronised global growth with a) trade between emerging markets nearly doubling since 2008, and b) investment flows into the G20 double what they were before the financial crisis.

Few investors amongst us won’t have heard of the exploits of The Famous Five, a group of four school friends and their faithful dog Timmy. This iconic group of lifelong friends, whilst on summer holidays in the English countryside would embark on a series of adventures which either resulted in the uncovering of buried treasure or the foiling of whatever criminal exploits were taking place around them.

President Theodore Roosevelt once said, in relation to US foreign diplomacy, “Speak softly and carry a big stick.” It seems President Trump has re-tasked that phrase to read, “Shout loudly (over Twitter) and wave a big stick as often as possible.”

In the wake of the last Italian election, we released an article highlighting the volatile nature of Italian politics. Since then, and true to form, Italy has managed to deliver another bout of political chaos which now marks the longest period of uncertainty for Italian politics since WW2. We will endeavour to explain where we are on this roller coaster and our position for clients.

When US President Donald Trump came to power last year, he brought with him an ambitious list of goals, including; building a wall between the US and Mexico, preventing some ethnic groups from entering the US, reforming corporate tax, withdrawing the US from climate pacts and addressing the trade deficit with China. He wanted to drain the swamp and fight the status quo -  a rebel if you will. He promised to shake things up and has recently been doing just that, by pursuing his protectionist agenda - much to the dismay of global markets. The threat of a so called ‘trade war’ is rising, and the main target of Trump’s opening salvos – China – can and will strike back.

Much has been made in sporting history about German-Italian football rivalry. The two most successful football nations in Europe have made a collective fourteen appearances in FIFA Wold Cup finals, which is more than the rest of Europe combined. However, more recently, it is very much the German team who showered themselves in glory by lofting the 2014 World Cup trophy in Brazil. This success comes in stark contrast to the Italian team who very publicly failed to qualify for this year’s game in Russia. It would appear then, with all eyes on the German team defending the title at this year’s World Cup, this age-old rivalry is looking decidedly one-sided.

For the past nine years we have been in the grips of a steady, if not rampant, Bull market in financial products. The financial disaster of 2008 seems long gone...and it is. For almost six years now, it has also been a story of almost unquenched, steady growth in financial assets and benign volatility. Making money on a consistent and steady basis is never so straightforward. So much so, we read article after article declaring “the new norm”. There is no such thing, and markets will always be at the vagaries of buyers and sellers. In short, they revert to type. The real world has returned...it is simply not that easy!

Well, we know predicting recessions is not an easy game. Indeed, one of the IMF’s chief macroeconomists, Prakash Loungani, recently observed that, over history, economists had consistently failed to predict 148 of the last 150 global recessions. If anything, the game of forecasting is getting harder, as any future recession will come off the back of central banks pumping $12 trillion into capital markets and setting interest rates to the lowest levels in history.

With this bull market now approaching its 10th year of straight gains, one cannot deny it’s been a great ride for investors and fund managers. Investment return over the timescale has been slow but sure and remarkably consistent. The champagne industry may attest to how steady things have been. However, has the market become complacent when it comes to evaluating risk? For the last 10 years things have only ever gone up, after all.

With the global bull market in equities entering its 10th year, we have, since the financial meltdown of 2008, lived through an era of long term positive investment return. No matter what has been thrown at these markets over that time, they have (almost) serenely sailed on to new highs. Volatility has collapsed and investment return remarkably consistent for managed style portfolios. Great for clients and for all of us in the financial services industry if we simply stayed on piste.

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