These are seat-of-the-pants times for investors. When the global economic and political environment is so fragile that it imperils the profitability of global titans such as Apple and Samsung, it is a time for everyone to take note. The start of 2019 may have brought more realistic stock valuations, but everything from the US/ China trade war to Brexit to the rise of global populism casts a long shadow over financial markets.
In its 2017 Patient Capital Review, the government made its position clear – tax incentives would only be on offer where capital was genuinely at risk. This has seen the venture capital trust (VCT) sector undergo a number of key changes in recent years, designed to steer it towards smaller, higher-risk companies.
Investors in the stockmarket used to recognise that they had to take the rough with the smooth: stockmarkets could be a rocky ride. But investments usually worked out well if they were held for long enough. There has, however, been so much ‘smooth’ in recent years that many investors have forgotten about the ‘rough’ bit. The past year has been an abrupt reminder that stockmarkets are not without risk.
It has been an uncomfortable year in Europe. Political uncertainty – notably in the shape of the gilets jaunes protesters in France and Italy’s populist government – has returned and could disrupt Europe’s fragile economic recovery. To the extent that there ever was a party in European stockmarkets, it appears to be over.
For an area that is supposed to be the stable asset, ballast for a portfolio, fixed income has looked pretty rocky in 2018. Ten-year gilt yields have been as low as 1.15% and as high as 1.7%. The corporate bond market has bounced around with increasing unpredictability. If investors needed reminding that this is a new environment for bonds after a lengthy bull run, the past 12 months have provided ample proof.
Why do US interest rates and inflation forecasts affect bond yields? Cherry Reynard explains the workings of a confusing asset class.
At the end of 2017, the IA Europe ex UK sector was the place to be. Having shaken off the rising nationalist threat, shiny new leaders such as Emmanuel Macron looked set to take Europe into a new era. This year, in contrast, has reminded investors that Europe is still, well, Europe: mired in political problems, with growth slowing. The performance of European stock markets has reflected that weakness.
With interest rates at record lows, infrastructure trusts looked like the perfect solution. Paying an income of around 5 per cent plus, from a portfolio of government-backed assets such as hospitals and schools, they were a good option in an income-thirsty world. The trouble is, everyone else realised it too. The trusts moved to double-digit premiums and started to look unappealingly expensive.
Reliable income is still an elusive commodity. Interest rates may have moved higher, but savings accounts still don’t beat inflation. This seems to leave investors with an unexciting choice: the stock market, bonds or commercial property, all of which have had lengthy bull runs and are potentially unstable. Structured products, in contrast, remain widely overlooked.
If history is any guide, we may be nearing the end of a strong run in stock and bond markets. At more than 3,450 days, the bull market run in equities is already the longest in history and bond markets have started to roll over. There are sound reasons for this: interest rates are rising, valuations are high and the geopolitical environment is increasingly uncertain.