Category Archive: Market Commentary

  1. How do Currency Returns affect my International Investments?

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    Many investors take a global perspective when building portfolios to achieve their investment goals. With the potential benefits of an expanded opportunity set and increased diversification comes exposure to foreign currencies. Currency returns can be volatile, creating winners and losers. While there is little evidence that currency movements can be predicted, investors still want to know about whether to hedge their currency exposure.

    To answer this question, it is helpful to see whether exposure to currency returns is consistent with the investor’s goal. Some investors may want to hedge currency exposure due to the volatility of currency returns and the impact on a portfolio. In global equities, currency hedging does not meaningfully reduce portfolio volatility, since equities are generally more volatile than currencies. For fixed income, currency hedging can be a useful tool to reduce portfolio return volatility.

    This article looks at the impact of currency movements on global equity and fixed income portfolios as well as the merits of hedging.


    For investors with unhedged international investments, when their home currency appreciates it has a negative impact on returns; when it depreciates, the impact is positive.

    In 2018, the weakening of the pound versus the strengthening of other currencies had a positive impact on returns for British pound investors with holdings in unhedged non-UK assets, and contributed 3.9% from the returns as measured by the difference in returns between the MSCI All Country World IMI Index in local returns vs. GBP.

    Currency movements have had a positive versus negative impact on returns for British pound investors with about the same frequency, being positive half the time (12 out of 24 years) as measured by the difference in returns between the MSCI All Country World IMI Index in local returns vs. GBP. The implication for investors is that although currency returns may be volatile at shorter time horizons, they are not expected to be a driver of expected return differences over longer time horizons.


    Some investors may want to hedge currencies with the goal of reducing the volatility of returns. For an investor with a global equity portfolio, hedging currencies tends not to significantly reduce return volatility, as illustrated in Exhibit 1. Equities tend to be more volatile than currencies, so the volatility of an unhedged global equity portfolio tends to be dominated by the volatility of the underlying equities, not the currency movements. As a result, unhedged and hedged equity portfolios have had similar standard deviations.

    Fixed Income
    In global fixed income, hedging currencies is an effective way to reduce return volatility because currency returns are more volatile than investment grade fixed income returns. If the currency exposure is unhedged, the currency will be mostly responsible for the volatility in a fixed income portfolio. As shown in Exhibit 2, the annualised volatility of the hedged index (1.50%) is much less than the unhedged index (8.06%).


    For investors with global portfolios, their return is determined by the return of the foreign asset and the return of the currency. However, academic evidence suggests that currency movements are very difficult to predict in the short- to medium-term in a manner that is relevant for making investment decisions.

    Should an investor with a global portfolio hedge the currency exposure? The answer depends on investor goals and the underlying asset. For global equities, our research indicates that currency hedging does not meaningfully reduce portfolio volatility. In contrast, for fixed income investors with investment grade securities, hedging can be an effective way to reduce the volatility of returns.


    Currency hedging: Establishing a position that mitigates or decreases the risk associated with an existing currency position.
    Forward contract: An agreement to buy or sell an asset at a specified price on a future date.
    Market capitalisation: The total market value of a company’s outstanding shares, computed as price times shares outstanding.
    Standard deviation: A measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio.
    Volatility: A statistical measure of the dispersion, or variability, of returns for a given security or portfolio. Volatility is often measured using standard deviation.


    Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Diversification does not eliminate the risk of market loss.

  2. Total Cost of Ownership

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    Mutual funds have many costs, all of which affect the net return to investors.

    Costs matter. Whether you’re buying a car or selecting an investment strategy, the costs you expect to pay are likely to be an important factor in making any major financial decision.
    People rely on a lot of different information about costs to help inform these decisions. When you buy a car, for example, the list price indicates approximately how much you can expect to pay for the car itself. But the costs of car ownership do not end there. Taxes, insurance, fuel, routine maintenance, and unexpected repairs are also important considerations in the overall cost of a car. Some of these costs are easily observed, while others are more difficult to assess. Similarly, when investing in mutual funds, different variables need to be considered to evaluate how cost‑effective a strategy may be for a particular investor.


    Mutual funds have many costs, all of which affect the net return to investors. One easily observable cost is the OCF. Like the list price of a car, the OCF tells you a lot about what you can expect to pay for an investment strategy. OCF strongly influence fund selection for many investors, and it’s easy to see why.

    Exhibit 1 illustrates the outperformance rate, or the percentage of funds that beat their category index, for active US-domiciled active equity mutual funds that beat their category index, over the 15-year period ending December 31, 2017. To see the link between OCF and performance, outperformance rates are shown for quartiles of funds sorted by their OCF. As the chart shows, while active funds have mostly lagged indices across the board, the outperformance rate has been inversely related to OCF. Just 6% of funds in the highest OCF quartile beat their index, compared to 25% for the lowest OCF group.

    This data indicates that a high expense ratio presents a challenging hurdle for funds to overcome, especially over longer time horizons. From the investor’s point of view, an expense ratio of 0.25% vs. 1.25% means savings of £10,000 per year on every £1 million invested. As Exhibit 2 helps to illustrate, those pounds can really add up over time.

    Exhibit 1. High Costs Can Reduce Performance, US-Domiciled Equity Fund Winners and Losers Based on Expense Ratios (%)

    The sample includes US-domiciled open-end mutual funds at the beginning of the 15-year period ending December 31, 2017. Funds are sorted into quartiles within their category based on average expense ratio over the sample period. The chart shows the percentage of winner and loser funds by expense ratio quartile; winners are funds that survived and outperformed their respective Morningstar category benchmark, and losers are funds that either did not survive or did not outperform their respective Morningstar category benchmark. US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Small Blend, Small Growth, Small Value, and World Stock. For additional information regarding the Morningstar historical categories, please see “The Morningstar Category Classifications” at Index funds and fund-of-funds are excluded from the sample. The return, expense ratio, and turnover for funds with multiple share classes are taken as the asset-weighted average of the individual share class observations. For additional methodology, please refer to Dimensional Fund Advisors’ brochure, Mutual Fund Landscape 2018.

    Past performance is no guarantee of future results.

    Exhibit 2. Hypothetical Growth of £1 Million at 6%, Less Expenses

    For illustrative purposes only and not representative of an actual investment. This hypothetical illustration is intended to show the potential impact of higher expense ratios and does not represent any investor’s actual experience. Assumes a starting account balance of £1 million and a 6% compound annual growth rate less expense ratios of 0.25%, 0.75%, and 1.25% applied over a 15-year time horizon. Performance of a hypothetical investment does not reflect transaction costs, taxes, other potential costs, or returns that any investor would have actually attained and may not reflect the true costs, including management fees of an actual portfolio. Actual results may vary significantly. Changing the assumptions would result in different outcomes. For example, the savings and difference between the ending account balances would be lower if the starting investment amount were lower.


    The poor track record of mutual funds with high charges (expense ratios) has led many investors to select mutual funds based on OCF alone. However, as with a car’s list price, an OCF is not an all-encompassing measure of the cost of ownership. Take, for example, index funds, which often rank near the bottom of their peers on OCF.
    Index funds are designed to track or match the components of an index formed by an index provider, such as Russell or MSCI. Important decisions in the investment process, such as which securities to include in the index, are outsourced to an index provider and are not within the fund manager’s discretion. For example, the prescribed reconstitution schedule for an index, which is the process of deleting or adding certain stocks to the index, may cause index funds to buy stocks when buy demand is high and sell stocks when buy demand is low. This price-insensitive buying and selling may be required so that the index fund can stay true to its investment mandate of tracking an underlying index. This can result in sub-optimal transaction prices for the index fund and diminished overall returns. In other words, for a given amount of trading (or turnover), the cost per unit of trading may be higher for such a strictly regimented approach to investing. Moreover, this cost will not appear explicitly to investors assessing such a fund on OCF alone. Further, because indices are reconstituted infrequently (typically once per year), funds seeking to track them may also be forced to buy and sell holdings based on stale eligibility criteria. For example, the characteristics of a stock considered value as of the last reconstitution date may change over time, but between reconstitution dates, those changes would not affect that stock’s inclusion or weighting in a value index. That means incoming cash flows to a value index fund could actually be used to purchase stocks that currently look more like growth stocks and vice versa. Metaphorically, these managers’ attention may be more focused on the rear-view mirror than on the road ahead for investors.

    For active approaches like stock picking, both the total amount of trading and the cost per trade may be high. If a manager trades excessively or inefficiently, costs like commissions and price impact from trading can eat away at returns. Viewed through the lens of our car analogy, this impact is like the toll on your vehicle from incessantly jamming the brakes or accelerating quickly. Subjecting the car to such treatment may result in added wear and tear and greater fuel consumption, increasing your total cost of ownership. Similarly, excessive trading can lead to negative tax consequences for a fund, which can increase the cost of ownership for investors holding funds in taxable accounts. Such trading costs can be reduced by avoiding unnecessary turnover and seeking to minimise the cost per trade.

    In contrast to both highly regimented indexing and high-turnover active strategies, employing a flexible investment approach that reduces the need for immediacy, and thus enables opportunistic execution, is one way to potentially reduce implicit costs. Keeping turnover low, remaining flexible, and transacting only when the potential benefits of a trade outweigh the costs can help keep overall trading costs down and help reduce the total cost of ownership.


    The total cost of ownership of a fund can be difficult to assess and requires a thorough understanding of costs beyond what an OCF can tell investors on its own. We believe investors should look beyond any one cost metric and instead evaluate the total cost of ownership of an investment solution.

    1 A stock trading at a low price relative to a measure of fundamental value, such as book value or earnings.
    2 A stock trading at a high price relative to a measure of fundamental value, such as book value or earnings.

  3. Déjà vu All Over Again

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    Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities. Over the years, these approaches have sought to capitalise on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”


    Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go.

    • In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan.
    • A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or trends have come into and fallen out of vogue.
    • In the 1950s, the “Nifty Fifty” were all the rage.
    • In the 1960s, “go‑go” stocks and funds piqued investor interest.
    • Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of information technology and telecommunication services.
    • During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular.
    • In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded.
    • As investors reached for yield in a low interest rate environment in the following years, other funds sprang up that claimed to offer increased income generation, and new strategies like unconstrained bond funds proliferated.

    More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered attention among investors.


    Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices. Any individual trying to outguess the market by constantly trading in and out of what’s hot is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world.

    With the benefit of hindsight, it is easy to point out the fortune one could have amassed by making the right call on a specific industry, region, or individual security over a specific period. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it.

    It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds available to investors in the world’s biggest market, the US, at the beginning of 2004, only 55% still existed at the end of 2018. Similarly, among equity funds, only 51% of the 2,786 funds available at the beginning of 2004 endured.


    When confronted with choices about whether to add additional types of assets or strategies to a portfolio, it may be helpful to ask the following questions:

    1. What is this strategy claiming to provide that is not already in my portfolio?

    2. If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal?

    3. Am I comfortable with the range of potential outcomes?

     If investors are left with doubts after asking any of these questions, it may be wise to use caution before proceeding. Within equities, for example, a market portfolio offers the benefit of exposure to thousands of companies doing business around the world and broad diversification across industries, sectors, and countries. While there can be good reasons to deviate from a market portfolio, investors should understand the potential benefits and risks of doing so.

    In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a financial adviser can help individual investors create a plan that fits their needs and risk tolerance. Pursuing a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve investors’ chances of achieving their long-term financial goals.


    Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research and implementation may be the most reliable path to success in the global capital markets.

  4. A tough year for UK Shares

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    The FTSE 100 ended the year down 12.5%, its worst performance in 10 years. Few sectors or, for that matter, global markets, avoided a decline.

    The FTSE 100 in 2018
    The FTSE 100 ended 2018 12.5% down from where it started, having failed to spend much time above its 7,687.8 starting level. This year’s roller coaster ride into Christmas did not help but, as the graph above shows, the market was mostly heading down from late May onwards.

    In 2018 the FTSE 100 outperformed its FTSE 250 counterpart, helped by the large-cap index’s bias towards multinational companies. Sterling fell by nearly 6% against the US dollar over the year, although its decline against the euro was only 1.1%. The table below summarises the movements of the main FTSE indices.

    Index Change Comment
    FTSE 100 -12.5% A widespread decline
    FTSE 250 -15.6% UK focussed cos underperform Footsie
    FTSE Small Cap -12.4% Small caps beat mid cap but only match big-cap
    FTSE 350 Higher Yield   -13.9% Value-investing offered no escape
    FTSE 350 Lower Yield -12.0% Growth did little better than value
    FTSE All-Share -13.0% Underperformed Footsie due to mid caps
    FTSE Tech Hardware +34.2% Top sector: only three constituents
    FTSE Tobacco -44.9% Bottom sector: BAT was biggest Footsie faller

    Over the year, the dividend yield on the FTSE All-Share rose from 3.59% to 4.46%, implying dividend growth of 8.1%. However, as last year, this figure needs to be treated with caution because the poor performance of sterling will once again have boosted the value of the dollar-denominated distributions from the heavyweight dividend payer likes of BP, HSBC and Shell.

    The rise in the equity dividend yield contrasted with a 0.1% drop in the 10-year gilt yield which ended 2018 at just 1.14%. Two-year gilt yields, more sensitive to base rate than their longer brethren, rose from 0.49% to 0.75%, almost perfectly matching the 0.25% increase in the base rate over the year.

    The performance of the UK equity market appears below the global average. In sterling terms, the MSCI World was down 4.9%. However, that worldwide performance was helped by the relatively strong (but still negative) US market: the MSCI World ex USA recorded a fall of 11.2%.

    In the emerging markets, outside Brazil, investors returns were mostly in the red: The MSCI Emerging Markets Index was down 11.5% in sterling terms. The blight of the index reform also struck – in the year MSCI added mainland China to its EM indices, the country’s stock markets had a hard time – the Shanghai Composite ended down almost 25%.

    In 2017, the Footsie closed the year at an all-time high of 7,687.77, having never fallen below 7,100. However, 2018 marked a return to a less benign environment, not only in the 12-month return figure, but also with the re-emergence of volatility. With a yet undetermined form of Brexit theoretically less than three months away, 2019 could be an equally ‘interesting’ ride. The one potential redeeming feature is dividend yield, which is close to a nine-year high and nearly twice covered by earnings.

  5. Christmas markets aren’t the only ones to watch

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    If you started getting financially organised this year, then you should have set yourself some outcomes in January. The Money Plan is a book and a system I created to getting people on track, which includes splitting the year into quarters where you can ‘check in’ to assess your progress towards your goals.

    By Q4, those following the plan will have financial foundations in place, including a will, lasting power of attorney and an emergency reserve of cash. Some people will be in the phase of paying down their debt; others will be considering investments and saving for the future, which often means investing in the stock markets.

    The markets have been very volatile lately. There are two main reasons for that: first is the uncertainty caused by events around the world, from the trade stand-off between the US and China, Brexit and its impact on Europe, and the mid-term elections in America

    The stock-market is a forward-thinking machine and because politicians don’t know what the outcomes of these and other events will be, the market doesn’t know either. That causes concern, and prices go up and down accordingly.

    The second reason for the volatility is the widespread rise in interest rates globally, which among other things is causing companies to pay more when they’re looking to borrow to grow.

    My feeling is that we’ll continue to see volatility as we move into and through 2019, with neither of the reasons above going away anytime soon.

    People can get nervous about investing when the market is fluctuating, but it’s important to remember that when you’re investing you should be in a long-term mindset – preferably at least seven years or more and it’s important you have a future vision, a reason why you’re investing in the first place.

    You can reduce your risk by investing in instalments. If you’re investing on a monthly basis rather than with a lump sum, you’re doing what’s called pound cost averaging. By investing at regular intervals, in a volatile market you’ll be purchasing more shares when prices are lower and fewer shares when prices are higher. If the markets do fall then pound cost averaging is advantageous.

    So should you wait? The numbers say not.

    The long-term return of the FTSE All Share is around 9.5% per annum on average. I’d always recommend people diversify globally, buying into collective investment funds around the world, which may also add a further premium to that figure.

    The current returns on deposits and savings is somewhere around 1.5% at best. Although if you invested in the market now you might see it fall in the short-term, you shouldn’t be investing for three, six or 12 months; you should be investing for five to seven or more years.

    Put simply, you’ll never be able to predict where the market is in terms of buying in at the bottom. That’s why we have an adage in financial planning: the best time to invest in the market was yesterday. The longer you’re in the market, the better your experience will be.

    If you’re investing a chunk of money which is considerable to you and you’d feel nervous if it quickly fell in value, then phase the money in over six months, a year or longer if you need to. This way you’ll take advantage of pound cost averaging, but if the markets do rise, you’ll just have to put it down to a learning experience.

    Academic research proves that pound cost averaging isn’t the optimal way to invest over the long-term, because most of the time the market is going up so you’d be better off putting your lump sum into the market in one go. But I’m a big believer in psychology and if you’re going to lose sleep at night, it’s not worth it – phase your money in over time and you’ll feel better about your investment experience.

    Warren Shute MSc. is a multi-award winning Certified Financial Planner and author of the bestselling personal finance book The Money Plan available on Amazon for £11.79.

  6. Index Funds Vs Active Fund Management

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    This short video clearly explains why were believe in using the Index Funds rather than Active Fund Management.

  7. Budget Update: I giveth and I taketh away….

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    The tax system is unnecessarily complex, caused by multiple amendments over the years and these complexities make it difficult to initially understand the real impact of any changes, until you drill into the detail.

    This week Mr. Hammond announced his budget and what caught the headlines was that he brought forward their manifesto promised to increase the personal allowance and higher rate band for income tax, but there was a little more to it, than the headlines.

    The personal allowance will increase to £12,500 and the higher rate threshold to £50,000, a year earlier than expected (from 2019/20).  This is good news and saves you, if you earn £50,000 or more £860 per person in income tax.

    What was not highlighted in his speech, were the changes to national insurance contributions, which partly counter the income tax savings.  Currently employees pay Class 1 National Insurance contributions at 12% on earnings from the Primary Earnings Threshold (£8,424 pa) up to the Upper Earnings Limit of £46,350, over this level you only pay 2%.

    The budget increased the Upper Earnings Threshold to £50,000 which means you pay an additional 10% national insurance on income from £46,350 to £50,000.  Therefore, if you earn £50,000 or more you will pay an extra £340 in national insurance – making the income tax saving of £860 only worth £520, a little less attractive!

    Therefore, legal tax planning is essential and for basic rate income tax earners the utilisation of the transferable Marriage Allowance is a key step.

    For all couples, as a bare minimum, both should use their personal allowances, starting/basic rate tax bands and the dividend and personal savings allowances to the full. This is particularly beneficial where income can be legitimately shifted from a higher or additional rate taxpaying spouse to a non, starting or basic rate taxpaying spouse.

    For those with cash and investments this will usually be facilitated by an unconditional transfer of income-producing assets from the higher tax paying spouse to the other.

    Upon initial introduction in 2013 the take up of the transferable marriage allowance was very low however, it has significantly increased since then and couples should ensure that they do not lose out on the ability to transfer the allowance where eligible to do so.

    Any such transfers would usually be capital gains tax and inheritance tax neutral as transfers between spouses living together are treated as transfers on a no gain/no loss basis for capital gains tax purposes and transfers between UK domiciled spouses (living together or not) are exempt from inheritance tax without limit.

    Warren Shute CFP is a Chartered Wealth Manager and author of the Amazon bestselling personal finance book The Money Plan.

  8. The Markets so far in 2018

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    The third quarter of 2018 is over. Returns have been mixed, with the USA the standout performer.

    For markets it has been an interesting nine months, with a fair slice of performance – good and bad – down to what has been happening in the USA, but what else would one expect with it being about 52% of the world market cap. The country has experienced three hikes in interest rates (with another still earmarked for December). On this side of the Atlantic, the Brexit process has rumbled on with no clear end yet in sight, while the Eurozone ended September with a renewed round of jitters about the financial profligacy of Italy’s populist government.

    For all the noise, many markets are little changed across the first nine months of 2018, a fact illustrated by the graph of the Footsie for the year to date:


    Looking more broadly, the nine-month out turns are shown below:



    YTD Change

    FTSE 100




    FTSE 250




    FTSE 350 Higher Yield




    FTSE 350 Lower Yield




    FTSE All-Share




    S&P 500




    Euro Stoxx 50 (€)




    Nikkei 225




    MSCI Em Markets (£)




    MSCI ACWI (£)




    2-yr UK Gilt yield



    10-yr UK Gilt yield



    20yr US T-bond yield



    10-yr US T-bond yield



    2-yr German Bund yield



    10-yr German Bund yield















    UK Bank base rate



    US Fed funds rate



    ECB base rate



    A few points to note from this table are:

    • The FTSE 100 has been on a rollercoaster ending up slightly short of where it started the year. Add in dividends – the yield on the FTSE 100 is now 4.01% – and the market produced a small positive total return.
    • The FTSE 250, regarded as a better yardstick for UK plc (although still with a weighting of overseas revenues of around 50%), has performed much the same as its FTSE 100 multinational counterpart. The problems of the retail sector have continued, along with Brexit uncertainties.
    • The US market performed strongly, helped by tax cuts and rising revenues. Rising interest rates and the vagaries of Donald Trump economic ‘policies’ seem to have passed the market by, witness the longest ever bull run for the S&P 500 recorded recently.
    • The Eurozone economies showed signs of losing momentum, with politics casting a cloud in Italy.
    • Emerging markets were the worst performers hit, as earlier in the year, by the rising US dollar and interest rates, with the most obvious victims once again Turkey and Argentina.
    • Bond yields have headed upwards over 2018 in the UK and US but remained flat in the Eurozone (excluding Italy). A fourth US rate rise is expected in December, with the next UK increase possible in February unless the inflation numbers improve and/or Brexit talks break down. The yield on 10-year US Treasury Bonds appears to be settling above 3% and is still close enough to the 2.7% 2-year bond number to keep some pundits watching for an inversion of the yield curve, followed by a recession.


  9. The Longest Bull Run Ever

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    Last week the USA stock market established another record – the longest bull run ever.

    On Wednesday of last week, the main US stock market index, the S&P 500, dipped marginally but still managed to set a new record. 22 August 2018 marked 3,453 days of bull market, which many commentators hailed as the longest ever for the index. That period topped the previous record, set between 1990 and 2000, when the US market enjoyed an internet-led technology boom, ending with the dot-com bust.

    The latest bull market arguably started on 9 March 2009 when share prices bottomed out in the wake of the 2007/08 financial crisis and the demise of Lehman Brothers in the previous September. At its low, the S&P 500 hit the devil’s number – 666 – a memorable floor from which it has since risen to a new closing high of 2874.69 (as of last Friday). As the graph above shows, there were a few hiccups on the way, such as the 2010 flash crash, the drop caused by concerns about China in the second half of 2015 and the sudden return of volatility at the start of this year. Nevertheless, since March 2009 the S&P 500 has achieved annual growth of 16.7%. UK investors in the US market would have done marginally better, as the pound has fallen 6.6% against the dollar since March 2009.

    The S&P 500’s record run has thrown up a number of interesting facts, which may (or may not) give comfort to those worried about the continued longevity of what has been described as the most-hated bull market of all time:

    • The generally accepted definition of a bear market, which puts an end to any bull market measurement, is a fall of 20% from the previous peak. However, the start date of the previous longest run (1990 to 2000) began after a market drop of 19.92%, not 20%. Stick precisely to the 20% threshold and the tech-bust of 2000 ended a bull market which started in December 1987 – a 4,494 day stretch.

    To add a further twist, the market sell-off in 2011, prompted by political dispute over the US debt ceiling, was also over 19%, but under 20%.

    • The 1990-2000 run produced a higher gain over the shorter period – 417% over 3,452 days against 323% over 3,453 days for 2009-2018.
    • Look at the performance of the S&P 500’s components since March 2009 and three sectors stand out. Consumer Discretionary posted gains of over 610% and Information Technology over 530%. Together those two sectors cover the FAANGs (Facebook, Apple, Amazon, Netflix and Google/Alphabet). Coming up third was Financials, a reflection of the recovery of the banks from the 2007/08 financial crisis.
    • Studying just the index numbers does not give a full picture of market value. The price/earnings ratio for the S&P 500 is currently around 24 whereas at the peak of the dot-com boom it was over 46. However, the S&P 500 index is 85% above its March 2000 level.
    • For most of the current bull market, dollar interest rates have been ultra-low and there has been no shortage of cash, thanks largely to quantitative easing. The Federal Reserve kept its main rate at 0%-0.25% for seven years from December 2008 and only crossed the 1% barrier in June 2017. By the end of 2019 the Fed consensus is that the rate will be 3.25%-3.50% and quantitative easing is now running in reverse and accelerating.
    • The current dividend yield on the S&P 500 is 1.77%, whereas the drumbeat of rising interest rates means that 2-year US Treasury bonds offer a yield of 2.62%. Holding cash and near cash is now a viable alternative for income-seeking investors.
    • In global terms, the USA market appears expensive. As at the end of July 2018, MSCI’s World Ex USA Index had a price/earnings ratio of 16.29 and a dividend yield of 3.10%.

    However you measure it, the US stock market has enjoyed a long, strong, run in this decade. How much further it has to go is a question which seems to have been around almost since the rally started, however Trump, love him or hate him, is fuelling the growth with tax reform and legislation simplication.

  10. Quarterly Market Review: Q2 2018

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    Please see Lexington’s 2018 Second Quarter Market Review which we thought you might find useful.

    This report features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the UK and international markets.

    Please click the here to open up the report.

    We hope you enjoy the read and if you have any questions please do not hesitate to contact us.