JULY 2018 MARKET UPDATE

Market sentiment continues to be dominated by political issues and developed equity markets have generally traded sideways whilst U.S. Government bond prices have improved.

We are making some changes to our tactical positioning within the model portfolios.

Over the past decade developed equity markets have trounced their emerging brethren in performance: emerging markets are less robust in the face of financial crises. In recent months this performance gap has widened further with some emerging markets declining precipitously – China’s equity index is down by around 25% from their high point during the past six months, for example.

There are many reasons for the recent falls but on top of local issues they have been especially vulnerable to the stronger dollar and the threat of US/China trade wars.

As you may recall from our update in April, we have had no exposure to emerging markets for a considerable period of time. They have never been quite cheap enough to overcome the risks of investing. As their prices decline further this default view becomes less and less justifiable. At certain prices the risk/reward of investing starts to become sufficiently attractive. Our analysis suggests that we have reached this point and that it is prudent to gradually start to build an exposure to emerging market equities: we are therefore using some of the cash to make a modest initial investment into the area via a passive fund.

In addition, given the significant outperformance of the UK equity market relative to the US, we are making a very minor downward adjustment to our UK blue-chip equity holdings and reinvesting the proceeds into the US equities.

Global equity markets overall remain expensive compared to historic levels, and after these changes we still retain a cash exposure of 9.0%-12.0% in cash (dependent on the model). We should emphasise that this not only provides a defensive cushion, but also gives us the option to take advantage of similar opportunities in the future.