June 2018 Market Update

— Jun 15, 2018


Two issues dominated equity and bond markets during the past month.

The first was the Italian election result. This saw the populist parties, which are both anti-EU and anti-austerity budgets, do better than expected at the polls and triggered a return to the state of governmental instability that has characterised post-war Italian politics.

This raised the possibility of the country leaving the EU at some stage. The idea of lending to the Italian Government for virtually zero return, as was the case prior to the election, without the financial backing of the EU is somewhat laughable: Italian sovereign bond yields rose sharply as did other weak EU country bond yields.

Secondly, the prospect of trade tariffs and a reciprocal trade war re-emerged, though this time it was the EU, Mexico and Canada’s turn, rather than China, to face Mr Trump unilaterally imposing tariffs on them: affecting stock markets globally.

These issues, being inherently geo-political rather than economic in nature, do not fit conveniently into macro-economic models; analysts find them difficult to model and it decreases their confidence in the outputs of their analysis all of which makes markets nervous. However, the very notion that these analysts are able to forecast either the occurrence or the consequence of such events is, of course, fanciful: the reality is that as a group, they cannot forecast anything with any degree of accuracy.

As Warren Buffett succinctly put it “the only value of stock forecasters is to make fortune tellers look good”.

Despite this volatility, global stock markets continued their rebound from March’s low point. The FTSE100 was up 2.4% and the FTSE All World Index (a broad index of global stocks) was up 0.6%.

Our investment approach is not predicated on forecasting geo-political events or macro-economics. Global equity markets are expensive compared to historic levels, we therefore remain cautious, maintaining 12%-13% in cash (dependent on the model) and retain our underweight positioning in overseas equity.