With an increasing focus in the market on how we are all building our client portfolios, it is incredibly important to have a strong and defendable investment framework in place. This investment framework consists of, but is not limited to, how we structure our investment committee, what our APL looks like, and where we get our research from. 

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It’s a challenging time for asset allocators in the current environment, which has seen asset prices and market sentiment shift quickly on the back of a single tweet. Markets in July were generally strong across most assets, but August has seen a re-emergence of trade tensions between the US and China. More importantly we have seen the yield curve invert with the 10-year US treasury falling below the 2-year treasury for the first time since 2007, which, as you may recall from the text books, has historically been an indicator of economic weakness.

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It’s been an eventful month for markets – the Coalition won the federal election in a surprise upset, the RBA cut rates to record lows, and US-China trade tensions re-emerged with a vengeance. Domestic markets reacted positively to the Coalition win, with some of the pessimism surrounding the housing market subsiding. The RBA’s rate cut was not unexpected, with most analysts having already priced in the cut and potentially another.

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Markets continued their upward trajectory during April which has largely continued unabated since the so called ‘Powell put’ earlier in the year, with the US Fed chair signalling a pause to further rate hikes. However, market volatility has picked up as the US-China ‘trade war’ has been reignited as the US seeks to precent Chinese telecom manufacturer Huawei from accessing US suppliers. 

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It’s been an interesting period for risk assets over the past six months. The last quarter of 2018 saw markets retract as sentiment shifted away from risk assets, driven by fears of further rate rises in the US and a pullback in global growth. Roll forward to the March quarter of 2019 and it has been risk on for equities, with both Australian and global markets posting double-digit returns for the quarter.

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Equity markets have continued their upward trajectory, boosted by the Federal Reserve’s decision to place rate hikes on hold. But how long can markets remain placated? Despite the reprieve, key market risks remain, including a reduction in liquidity as central banks cease their quantitative easing programs, and tighter credit conditions, which have had a significant impact on those parts of the market supported by cheap debt and ample liquidity.

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A study by Cambridge University suggested that a ‘bad news day’ increased magazine circulation by as much as 30% and a ‘good news day’ resulted in a 66% decrease in readership – the latter being online material.

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Equity markets have continued their recovery through February, with the S&P 500 and S&P/ASX 300 both rising 5.2% in Australian dollar terms in the first three weeks of the month. This comes on the back of January’s gains of 4.5% and 2.6% respectively. In price terms, the US index has recovered from a sharp fall in December, while the ASX has clawed back nearly all losses suffered in the final quarter of 2018.

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2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

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Markets have continued to experience volatility over the month. The US market in particular has experienced significant volatility with technology stocks facing the brunt of the turbulence. Until recently the tech sector was a significant driver of US market returns, making up over 20% of the S&P 500 Index.

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As Mark Twain was famously quoted “history never repeats itself, but it rhymes” is ……for October 2018 past. I prefer the more recent lines from a Split Enz classic “history never repeats I tell myself before I go to sleep. Don’t say the words you might regret, I lost before, you know I can’t forget!”.  

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We are seeing signs of volatility returning to markets, which has been reflected in an increased divergence in returns between regions, sectors and securities alike. For some time, we have flagged that volatility in markets has been subdued, underpinned by a wave of liquidity being pumped into global economies by central banks in the form of quantitative easing (QE). We have seen bond yields trade at historic lows and the subsequent low interest rate environment has led to increasing debt levels among both corporates and households.

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It may surprise many of you who have never visited Munich (Germany) in September that their world famous Oktoberfest beer festival is actually already in full swing – not October as the name suggests!

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The US economic engine continued to chug along in August. The August Manufacturing ISM Report of Business recorded the US PMI (survey of purchasing managers) at 61.3, signifying continued expansion, with the overall economy growing for the 112th month.

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The markets continue to look like Louis Vuitton – where the glamorous and sparkly are eye-wateringly priced compared to the ordinary. Wealth inequality means an increasing percentage of the population will baulk at the ridiculous price of anything, and the same should apply to stock prices.

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