Market Jitters

News headlines last Friday highlighted a drop in world markets. Markets have recovered somewhat since last week’s drop and while we plan for volatility in our modelling, it is never welcome, but it is anticipated from time to time.

To put it in context, global share market volatility in the past week saw valuations down since the start of the month partially offsetting the gains of the previous twelve months.  Our assessment is that this has been a sentiment driven sell-off with markets digesting a range of issues over the last week; among them rising interest rates in the United States, trade concerns, and apprehension about profit margins as we enter the third quarter reporting season this week.

However, looking through this volatility, there are a range of underlying fundamentals that remain positive for global markets.  Three key themes underpin share market valuations:
•            Economic growth: leading surveys and leading indices point to further expansion.  Markets have historically fallen in reaction to the fear of recession and presently traditional recessionary indicators are not present (such as interest rate credit spreads, significant inflation or inversion in yield curves).
•            Earnings growth: company forecasts still remain positive with expectation of further growth over the next 12 months; and
•            Valuations: the MSCI global share market index is now valued at 14.7 times annualised company earnings. This is 10% below the long run average multiple of 16.
Whilst further bumps in markets will inevitably occur, our client portfolios are highly diversified, and the overall portfolio weighting is based on individual risk tolerance and objectives. This long-term strategic approach to investment is supported by substantial evidence as we position for both stable and volatile markets.

Market Volatility and Media Noise

The fall in the value of shares in the USA and other markets has hit news headlines this week suggesting it to be a dramatic turn of events.  In fact, whilst the initial 6% fall in any day is large in isolation, the event is not extreme in the context of market fluctuations often seen along the path that generates long term returns.

As we noted in our quarterly commentary for the period ending 31 December, investors were favoured with unusually smooth and strongly positive returns during 2017.  In this context the recent fall is well within the ‘normal’ range and the pullback has for the most part merely reversed the added gains of January 2018 returning values towards the closing prices of 2017. 

Financial theory teaches us that risk and return are related, and that we get a premium for taking risk.  Once we diversify out concentrated risks, that do not offer extra reward, we are left primarily with market risk expressed as volatility.  That is, markets will have occasional set-backs on the upward path of value creation arising from corporate profits and economic growth.  In this context the sporadic downturns are just as important as the uplifts, because without them there is no risk, and without risk there is no premium, and then we only achieve the cash rate of return, which for most of us is not enough.

It is natural to feel some emotion from the set-back that even a temporary fall in market value may provoke.  However, I am reassured by the process we use to manage your money and the confidence I have in it, to deliver returns over time in keeping with your objectives. This process includes taking a measured amount of risk, with the knowledge that it comes with occasional blips in market value, that we ultimately need because it is linked to the premium we seek. 

Axiome Quarterly Report

In our Investment Market Review we discuss the strong equity market performance over the past quarter and the continuing strong global growth forecasts for 2018, aided, in part by the large cut to corporate tax rates in the United States. Over the quarter and for the past 12 months, all asset classes have performed well and posted positive returns.

Our client education piece for this month discusses the benefits of using independent expertise to provide oversight and monitoring of the performance of fund managers.

Axiome Quarterly Report


Over the quarter we saw continuing good returns from equity markets that have performed strongly over the past 12-months. On the flip side fixed income continued to struggle, but also posted positive returns for the quarter.

Our client education piece for this month reviews the fundamental problem with any notion of Market Timing. Predicting when to exit and re-enter the market is fraught with difficulty and runs the very real risk of missing out on large upside gains as markets rally.