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A recurring theme of these Market Updates is that investors should take a long-term view and not worry too much about short-term volatility.  Asset-backed investments will always fluctuate in value and on occasion those fluctuations can be extreme.  The previous quarter illustrates this perfectly, with the FTSE 100 Index reaching a 16 month closing low of 6,888.7 on 26th March, before rebounding to hit an all-time closing high of 7,887.5 on 22nd May.  This equates to an overall movement of almost 15% over an 8 week period!

The fall and rise of the UK stock market, as well as other global indices, reflects the uncertain economic and geopolitical landscape.  Economic growth remains strong in many areas, but there is an underlying concern that growth will lead to inflation and higher interest rates, particularly in the USA.  Based on past experience, investors fear that if interest rates rise too quickly, growth will be stifled and the next phase of the economic cycle will be a downturn or even recession.  Stronger than expected data in the USA earlier this year increased the prospect of higher interest rates and served as a catalyst for the sell-off across equity markets.  Over the past couple of months however, economic indicators haven’t been quite as strong and therefore interest rate worries have eased and markets have rebounded.

Here in the UK, there was widespread consensus earlier this year that the Bank of England would raise the base rate in May.  That did not happen and whilst we wouldn’t rule out any increase in the base rate this year, it is looking less likely with inflation steadily falling back towards its target rate.

We continue to hold an optimistic view on the medium to long-term prospects for asset-backed portfolios, with two potential scenarios being taken into consideration; interest rates remain at or around present levels, or interest rates “normalise” over the next 3 to 5 years.  With the first of these scenarios, even though economic growth may be muted, the income return available from real assets (shares and property) of around 4% pa should continue to look very attractive compared to cash-based holdings yielding around 1% pa.  On the other hand, if savings rates were to increase to around 3%+ pa, it is reasonable to assume that this would be the result of a strong performing economy, leading to inflation and growth, both of which should boost the returns from real assets.

Either of the above scenarios should be conducive to diversified asset-backed portfolios outperforming cash deposits and inflation over the medium to long-term.  It is important to remember however that investment returns are never guaranteed and the two scenarios put forward aren’t the only potential outcomes.  Brexit hasn’t happened yet and remains a journey into the unknown, whilst President Trump continues to surprise with his capricious approach to running the largest economy in the world.  Perhaps the biggest uncertainty comes from the “unknown unknowns”, i.e. events that nobody sees coming.  This is how it has always been, which is why investments are prone to bouts of heightened volatility such as we have seen over the past few months and will see again in the future.  Which takes us right back to the opening line of this Market Update….

The information in this guide was correct as at 5th June 2018. This article does not constitute as personal advice and guidance should be sought to ensure that any investment meets your individual circumstances including risk tolerance and capacity for loss. The value of investments can fall as well as rise and you may get back less than you pay in. Past performance is not a reliable guide to future performance.

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This post was written by Steven Hodgson