Q3 2017: Insights from our Quarterly Investment Review

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Wednesday, November 22, 2017

Q3 2017: Insights from our Quarterly Investment Review

With lower growth forecast over the next few years, what will this mean for investors?

Volatility low – yet uncertainty high

As highlighted in Philip Hammond’s Budget today, it is reasonable to expect lower growth from the UK over the next few years. Inflation is likely to settle within the target range set by the Bank of England and we should expect only small increases in interest rates.

This view reflects the stance of FPC’s Investment Committee on asset allocation which is to increase exposure to global equities. We need to look beyond our shores for that extra bit of return and diversification.  

The past is no guide to the future! 

In the last 12 months fixed interest have fallen in value slightly (-3.5%), cash has been flat (0.5%), and property and shares have gone up in value significantly– by 10.5% and 15.5% respectively.

Most investors will have achieved decent returns as a result, with higher-risk portfolios doing especially well.  This follows even stronger performance in the previous 12 months, so the two and three-year figures look very good indeed.

Here, the shaded bars represent the likely range of returns for each of three sample portfolios, based on an investment of £100.  For example, we think most of the time (nine times out of ten) a medium-risk portfolio will return between -£10 and £20 in a year.

The white bars show our central assumption and the white diamonds the actual experience over 12 and 36 months.  The portfolios are constructed using indices representing the main asset classes and arebased on the investment committee’s guidance, issued quarterly.

These stellar returns have come at a time of extraordinarily low stock market volatility: VIX, Wall Street’s fear index, is almost as low as it’s ever been in the last quarter of a century.  And credit spreads (the extra return you might expect over ‘safe’ government bonds) are also very narrow.

This could continue, or it could change, perhaps in response to:

  • Brexit uncertainty
  • Unexpected interest rate rises in the UK and US
  • The situation in Korea 

… or something else entirely.

Independent investment economist, Peter Stanyer comments:

"None of us know how things will evolve, but as investors this illustrates the benefits of holding a dependable buffer of cash and secure income flows that are sufficient to meet needs for a reasonable time period. In bad times, a temporary buffer buys time to consider different options.

It is normally foolish to try to forecast the arrival of bad times and it is normally better to stay the course with a considered long-term strategy."

We’d encourage all of our clients to think about how much cash they need and of course, we can help with that.

In the meantime, at review, we’ll be making a few tweaks here and there – not wholesale changes.

If you have any questions, please contact us by email or call us on 01704 571777.