Strong returns in Q2, when added to the market rally during Q1, ensured that most global equity markets have now recovered from the lows reached in 2018. However, it’s been far from plain sailing. The risk on/off pendulum has certainly been in full swing, oscillating over the last three months.
With global equity markets producing solid returns in the first four months of the year, it was unsurprising to see markets pull back in May - trade tariffs were once again on the agenda. We have long held the view that there are no winners in a trade war, but rather which side loses the least. The ramifications are beginning to feed through as global growth is seen as slowing down and companies earnings are revised lower. These concerns are discounted by the market through lower share prices and investors seeking safety in assets less exposed to trade.
The G20 (Group of Twenty) summit provided an opportunity for President Trump and President Xi to hold a separate meeting. The meeting led to a thawing in relations between the two countries, allowing trade negotiations to resume and provided the market with some reassurance that a trade deal is potentially close.
Throughout this period we have kept a marginal ‘risk-on’ stance to portfolios as we continue to favour growth asset classes, such as equities, over stabilising assets. We have taken opportunities, where possible, to reinvest any surplus cash over the period, yet maintain a pragmatic approach to timing given where markets are currently positioned. One of our tactical decisions during Q2 was to add Index-Linked Gilts to many portfolios during April. The position provided an element of protection during the volatility in May and going forward should help reduce the overall correlation of portfolios to the equity markets.
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