Financial markets hate uncertainty but the global pandemic has taken uncertainty levels to fever pitch. “We have plunged into the Valley of Darkness, and we don’t know how long we are going to be there,” warns Richard Dunbar at Aberdeen Standard. “But we can be sure that when we finally emerge, the landscape is going to be different.”
The bears are capitulating,” declares Connor Broadley’s Chris Wyllie. That sounds like the rallying cry of a raging bull. It is not: Wyllie sees the wave of optimism that had stock markets roaring ahead in the closing weeks of last year as a reason to be cautious.
There is intense debate among our asset allocation panellists and the teams who support them, about the dangers of a global recession next year. Schroders’ Keith Wade has likened the world economy to a wobbly bike where growth momentum has become so weak that any bump in the road could topple it – if not next year, then in 2021.
The Great Monetary Experiment continues. In 2009, central bankers introduced us all to the weird alchemy of quantitative easing to get us out of the financial crash. To everyone’s surprise, they are still at it 10 years later, even though there are growing doubts about its effectiveness with interest rates already at rock-bottom.
Fears of recession are rising steadily in the investment community. Fortunately, central bankers are not sitting on their hands waiting for recession to happen: since the beginning of the year they have collectively transformed the outlook for interest rates. Equity markets have responded with double-digit gains since the low point just before Christmas last year.
A year ago in this column, Keith Wade, chief economist at Schroders, issued a stark warning to investors. He said: “Very few people think the markets will be as good in 2018 as they were 2017.” That proved quite an understatement. The FTSE All World index, which covers shares in 50 markets, ended 2017 up 22% – its biggest rise since the financial crash. However, a year later it had lost almost all of those gains, mostly in the final febrile months of 2018.
The mood in financial markets changed quite dramatically in the second week of October. More specifically, Wall Street, which had seemed to defy gravity all year, finally cracked.
The strength of the dollar coupled with president Donald Trump’s sabre-rattling soap opera on trade war has put our panel of asset allocators more on the defensive. The global growth numbers remain too strong to persuade any of them to call an end to the long bull market in equities. But cash levels in their portfolios are rising, and the average score for global bonds (mostly US Treasury bonds) has edged higher.
Despite apparently benign market conditions, our panellists have become more cautious in their outlook.