SEPTEMBER 2018 MARKET UPDATE
The FTSE 100 has fallen from 7777 on the 8th August to 7350 at the time of writing on 20th September, a fall of (5.5%).
The FTSE 100 is constituted of largely international companies with 75% of FTSE 100 constituents’ earnings generated overseas. In particular, mining companies and banks have been amongst the worst affected by market concerns of a worsening trade dispute between the US and China. These sectors are likely to remain volatile in the coming months.
China itself has now entered a bear market: the term used for when a stock market declines 20% or more from its peak (in this case its high back in January).
The fall in equity markets was welcome. As we have previously noted equity markets are expensive compared to historic levels, which results in a lower expected future return with increased risk. As a consequence the models have been positioned defensively, with cash reserves in excess of 10%. The purpose of maintaining cash balances at these levels is to provide us with the opportunity to acquire assets more cheaply when markets fall.
The decline in China and other emerging market stock markets was behind our decision to begin deploying some of the cash reserves in the models back in July, when we took a small position in emerging market stocks (between 1% and 4% in strategies 4 to 7 respectively). With this recent fall in the FTSE 100 we have taken the opportunity to deploy a further portion of the cash reserves into UK equities. The model portfolios are now marginally overweight UK equity (1%-3%) and the cash reserves have been reduced to between 5% and 9% (down around 4% from the prior month).
Overall the models continue to be defensively positioned. We are underweight equity-like risk (overseas equities and alternative investments) in the models and the debt holdings remain focused on high quality sovereign debt and asset backed securities.