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Global equity markets ended September in positive territory as investors weighed up the latest turns in the trade war between the world’s two largest economies, namely the US and China. September was a more challenging month for fixed income markets though with many sectors recording their first negative monthly return of the year so far. In large part, this reflected movement in government bond yields, which increased from the record lows reached in August. The rise in government bond yields over the first half of September was driven by signs that the global economy may be stronger than had previously been anticipated and a potential thawing of trade tensions, but recent manufacturing data has been less encouraging. High-level U.S.-China trade talks resumed in Washington earlier this month and the markets responded positively, although it is still unclear whether or not both countries believe a deal has been reached. Further rounds of negotiation are expected before any final agreements are made.

The following chart reflects the performance of the MSCI World index over the year to date, rising almost 20% over the period, in sterling terms, notwithstanding some heightened volatility. In particular, such volatility was experienced in early August 2019 as global trade tensions escalated.

The MSCI World is a market cap weighted equity market index of over 1600 stocks from companies throughout the world, although excludes companies in emerging and frontier markets. It is a widely used benchmark to assess how equity markets have performed globally.

September saw an acceleration of a trend that has been in place for much of 2019. Indicators of global economic activity continued to weaken – driven particularly by a slowdown in manufacturing activity as global trade tensions grow. In response to this, the world’s central banks have progressively stepped up their efforts to provide support. This has given investors the confidence that the strong performance of the bond market can continue, leading to rising prices for riskier bonds. Equity markets have been more turbulent as they have weighed the constant tension between economic reality and continued support.

The market’s expectations that US interest rates will fall significantly have grown

Behind these measurable trends affecting markets there is, of course, an ever-accelerating state of political turmoil in Europe, the United Kingdom and the United States.

Typically, politics affects economics and markets less than many people think. However, this is an occasion where the decisions being taken by politicians have such immediate consequences that the performance of markets in the year ahead may well be in the hands of US President Donald Trump, UK Prime Minister Boris Johnson and the leaders of the European Union.

Investors may hope that, as the effects of the trade wars waged by President Trump’s administration are felt in the economic data, this will give him pause for thought. However, so far, the affects have been felt more profoundly outside of the United States in economies sensitive to manufacturing – particularly in emerging markets.

In contrast, the domestic US economy, seemingly President Trump’s only pre-occupation, has been protected from the short-term impact because much of its economy is made up of the service sector.

For investors, positioning for this environment is challenging. The philosophy driving our approach is to take a cautious footing. Whilst we acknowledge that, in the short-term, central banks may support investments such as riskier bonds we are preparing for the time when the long run of strong market gains will come to an end.

The risk of such a tactic is that markets will continue to rise in the months ahead. However, we are clear that it is wiser to be early and prepared for potential market turbulence than wait for it to occur in order to capture the last gasps of a bull market.

Overall, of vital importance, is taking a balanced approach that spreads risk across multiple asset classes in order to avoid any one political or economic scenario determining the future performance of a portfolio. We have seen volatility in the markets this year as global trade tensions have escalated and then eased and we expect this to continue. Furthermore, Brexit has of course created volatility, especially with Sterling and we eagerly await a resolution. Our risk graded portfolios are well diversified and the following chart highlights the year to date cumulative performance of our 5 Growth low medium risk portfolio.

Burton & Fisher Financial Services is authorised and regulated by the Financial Conduct Authority (FCA) in the conduct of investment business. This document is only investment research and you should not treat this guide as a recommendation to buy, sell or trade in any of the investments, sectors or asset classes mentioned. Some of the market commentary has been provided by a selection of our preferred fund managers. The value of any investment and the income from it is not guaranteed and can fall as well as rise, so that you may not get back the amount originally invested. Past performance is not a reliable indicator of future results.