The age of uncertainty is back

Investors should avoid aggressive positions and situations that require a high degree of confidence to support valuations, argues David Jane.

For many years, financial markets have had a very benign backdrop. The era of quantitative easing put a floor under bond markets, forward guidance provided certainty over future US interest rates, and we had a relatively predictable political order.

These factors, combined with a growing economy and ultra-cheap money, may have given rise to a huge degree of complacency in financial markets, or irrational exuberance as it was once termed.

It feels as though this era has now ended and that the cynics are back in the driving seat. Credit spreads are on the rise, the yield curve is flattening and equities are having a torrid time.

Arguably, we have been building towards this for some time with some equity markets peaking towards the start of the year, while the high-growth technology stocks continued to make new highs.

Now, even this area of the market seems to have taken a significant turn for the worse, leading to the situation where 90% of asset classes have lost money this year.

A good sense for the tone of markets can be gleaned from the reaction to recent “news flow”. A slightly more dovish signal from US Federal Reserve chairman Jerome Powell implied that rates were close to neutral and that future moves would be data dependent, rather than rigidly following the forward guidance. While the initial reaction was positive, the market subsequently decided that such news increases uncertainty and is negative after all.

A year ago, such a statement would have been seen as unambiguously positive. Similarly, the positive noise on China-US trade negotiations initially led to a huge rally, but was quickly erased as market participants decided that there wasn’t enough detail.

In this environment, we feel that now is not a time to take aggressive positions and that investors should avoid situations that require a high degree of confidence to support their valuations.

We prefer areas supported by hard assets and cash flow in preference to high debt levels or belief in the future. This has led us to sell most of our remaining “growth” positions; we already had very few situations with high debt burdens outside utilities and infrastructure.

Looking ahead, we would like to see a much more settled tone and a clearer outlook before putting significant amounts of risk back into portfolios.

David Jane is manager of Miton’s multi asset fund range.

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