‘Success is where preparation and opportunity meet’ – Bobby Unser
Global financial markets have not had a happy October to date. The UK’s leading equity market index – the FTSE 100 – last week suffered its worst week since February, a statistic it shared with regional markets across Europe and Asia. Meanwhile the much-loved US technology sector, on Wednesday last week, has its worst individual day since 2011.
So what has changed so suddenly? The simple answer is not very much…however financial markets are highly influenced over shorter-term time periods by investor fear and greed – a reality that has become central to the investment methodology of the Dynamic Opportunities Fund. For much of the last eight or nine years, greed has been in the ascendancy helped along by very low interest rates. This backdrop has been slowly changing in the last year. Whilst the Bank of England has edged interest rates up a couple of times, the main and most important shift has come from the Federal Reserve in the United States. Higher interest rates are typically not good for stock markets or economies as they raise the cost of borrowing and increase hurdles to new investment and this fear has increased. However interest rates remain low versus historic norms and there is little evidence so far of a major impact on global economies in terms of a negative impact on global growth rates.
Another fear factor that has built over recent months has been around world trade and global diplomacy. Despite breakthroughs in recent week in the trade negotiations between the countries of North America, 2018 has seen the heightened application and promise of new tariffs, particularly between the United States and China. This has been one reason why, to date, the geographic exposure of the Dynamic Opportunities Fund to Asian investments has been limited and typically defensive in orientation. However this may change over time as the outlook on these issues appears better too. In our opinion, it is likely that the upcoming midterm elections in early November in the United States are going to be influential, as they may limit the ability of the United States to continue lobbying so aggressively for global trade reform.
So if interest rates and world trade related issues are not sustainably problematic – and there has even been some progress in other pertinent macroeconomic issues such as Brexit which have influenced our UK domestic equity portfolio selections for the Dynamic Opportunities Fund – we come back to fear and uncertainty as the biggest contributor to current market volatility. With little to fully back up these concerns over time and with continued high dividend yields available on most global stock markets, opportunities for stock picking funds like our own remain solid. As one famous investor once noted it is always best to be greedy when others are fearful. Or, at least, not to become overly fearful at times of shorter-term financial market volatility. To this end, our investment research ideas list remains strong…and this is even before the deluge of global corporate earnings reports over the next few weeks.
It is a fascinating time to be a global investor!