Summary
In our Q2 Investment Commentary, we take a look at some of the key events and drivers which have impacted global markets and asset classes in the period. Our analysis stretches from the UK, through to Europe, North America and the Far East. Trade wars were again a dominant feature in the period, however the prospect of more accommodative monetary policy was warmly received by equity and fixed income investors.
5 min read
Introduction
There are few nations in history as innovative as the Japanese have been these past 50 or so years. When you think of Japan, your mind is perhaps drawn to images of the bullet train, the video recorder or the lithium-ion battery. A Japanese newspaper conducted a survey back at the start of the century asking what the Japanese considered their biggest contribution to the world and the top 3 responses were Karaoke, the Sony Walkman and, in first place, the cup noodle.
Whilst the latter may not have made quite such an impact in the west, the Japanese continue to innovate. They were well ahead of the rest of the world in having a catastrophic financial crisis back in the 1990s, although they outdid everyone in the size of their banking collapse.
Their response to this also saw innovations which have been adopted by other countries in the past ten years. Their ‘Zero Interest Rate Policy’ preceded ours by 10 years and the same is true of Quantitive Easing (where the central bank pushes down long term interest rates by buying huge quantities of government bonds).
They also invented a phrase for the relative failure of all these loose policies to stimulate demand: ‘pushing on a string’. It means that even if you move the part of the string you are touching, the rest of the string doesn’t move. In a financial context, it means that traditional methods of simulating economic growth, such as low or negative interest rates, simply don’t work the way politicians and central bankers think it will.
The Japanese have been trying these new ideas for almost 20 years now and inflation is barely positive and house prices are around 70% below their 1990 peak.
It is a phrase which may be coming our way soon, for as growth cools, central banks are running out of tools to help economies grow faster. The European Central Bank in particular has followed the Bank of Japan’s playbook, but despite all their efforts, growth is anaemic and inflation is well below their target, and the same is largely true in the UK.
“Against a backdrop of slowing economic growth and a subdued inflationary environment, central banks continue to maintain their accommodative stance.”
Investors’ verdict on this can probably be seen most clearly in bond markets where investors in UK government bonds are currently being asked to lock up their money for 10 years at an interest rate of 0.8% p.a. This means they are guaranteed to lose money after current inflation. In places like Germany, the situation is even worse with the absolute level of yield available for ten years being minus 0.3% p.a.; investors are guaranteed to lose money in absolute terms. You are effectively paying the German government for the privilege of lending them money, just as buyers of Japanese government bonds have been doing for many years.
There are still pockets of positive yields – for example the Austrian government has bonds with a yield of around 1.2% p.a. The catch is that this bond does not mature until 2117. Buyers better hope that the next 100 years of Austrian history are less traumatic than the past 100 years.
And yet, despite these ridiculously low interest rates, demand has been rising.
There are several ways you can justify buying something which is guaranteed to lose money – in the case of bonds, this is often linked to regulations on pension funds and banks being forced to buy them – but such behaviour cannot be described as rational. As rational investors who look to grow our clients’ wealth over the long term, we increasingly see government bonds as a way of protecting portfolios against catastrophe, rather than as a way of making money.
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Asset Class
Review
Second Quarter 2019
KEY TAKEAWAYS
Despite ongoing trade tensions, the second quarter proved to be another positive period for equity markets. Global stocks were supported by the prospect of more accommodative monetary policy as well as optimism relating to US-China trade talks. US markets reached record highs, whilst the UK also had a positive quarter despite the political uncertainty. It was also a positive period for fixed income assets, with both government and corporate bonds continuing their strong start to the year.
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We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.
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The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Nothing in this material constitutes investment, legal, credit, accounting or tax advice, or a representation that any investment or strategy is suitable for or appropriate to your individual circumstances.