On the QT. A time for Tactical?

2018 reminded investors that markets can go down as well as up. As markets began to adjust to life with quantitative tightening (QT), they were hit by a number of new challenges. Uncertainty, something which quantitative easing (QE) served to cancel out, has returned. Now, the path of markets in 2019 will be determined by how fast clarity re-emerges. This creates opportunities for different investment approaches to display their merits, and above all Parmenion’s tactical portfolios.

US: Are you sure you want to shut down your government?

The US stock market suffered a dramatic fall in the final quarter of last year, down over 11% in Sterling terms. American politics are in a dire state, with parts of the Federal government in shut down. The future of US/China trade is the key challenge. The US tariffs of 10% on Chinese imports and the latter’s retaliation can be expected to depress world trade. Less trade means lower growth, lower investment and lower profitability. Clarity as to whether an amicable agreement can be concluded will give markets a fillip.

The US economy appears to be doing well, with low inflation and unemployment, but with wage growth fuelled by the Trump tax cuts. In response, the Federal Reserve raised interest rates four times in 2018. This monetary tightening introduced some long forgotten volatility to the markets. Will the rises continue in 2019 or will the pattern of rate rises slow? The tax cut effect may fade and any escalation in trade tensions would also put a curb on further rate rises.

Emerging markets: A tough 2018

Rising US interest rates push up the international value of the dollar. They also pull capital out of the emerging economies into rock solid US Treasuries. In the Emerging Markets, for companies and governments who borrowed in US dollars when interest rates were low, a stronger dollar makes repayments more expensive. With China slowing in 2018 owing to a weaker property market and slower export growth, it is no surprise that Emerging Markets have been a poor performer in 2018, falling 9% in Sterling terms.

Eurozone: So many questions

Turning to the Eurozone, that region has a number of fundamental questions to answer. Italy appears to have reached an agreement with Brussels over their proposed budget plans (which is good news). However, France may now breach its budget limits as Macron gives in to the “gilet jaunes” with more spending (bad news!). The politics of Poland, Romania and Hungary have taken a sharply uncertain turn. And how will Brexit affect the structure and future of the Europe Union itself?

UK: Holding out for Brexit

And finally, what form will Brexit take after March 29th 2019, if it even happens at all? The FTSE All Share was down around 10% for 2018. There is some evidence that companies have been reluctant to invest until the Brexit outcome becomes clear. A positive resolution, may encourage companies and the consumer to spend and give the economy a lift. Sterling will be the best barometer of expectations on the outcome. It will also have the biggest impact on the direction of the FTSE 100, given its high exposure to overseas earnings. Weaker Sterling translates into higher profits for UK companies trading abroad. However, positive news on Brexit might hold back leading UK shares, if Sterling bounces.

Tactical Asset Allocation’s time to shine?

With the return of uncertainty, an opportunity is, obviously, created for tactical investment management to preserve capital and add value. In Parmenion’s Tactical solution we have, in fact, added exposure to the UK. We believe pessimism has run too far and have cut our exposure to Corporate Bonds, where the risks to capital look to have risen. In a year in which we will see how the new post-QE market paradigm unfolds, a tactical approach will have particular appeal for certain investors.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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