The last six months have embraced both the annual trough and peak for global equity markets as investors faced the fact that valuations were no longer unequivocally cheap, although low (even non-existent) yields on safe instruments such as bonds and cash meant that support for riskier assets was never completely absent.
The period began with markets, as measured by the MSCI World Index, in the midst of a near 10% “correction”, as concerns about economic growth in the United States and Europe were exacerbated by fears of Ebola spreading into the developed world at a time when recovery was already fragile.
As we entered spring, markets had more than recovered their poise and were close to the all-time high reached towards the end of March.
Meanwhile, sovereign bond yields remained at or close to historic lows. This was initially a result of fears about growth and also the risk of deflation as the price of crude oil fell by more than 50% when Saudi Arabia refused to cut its output to balance the market in the face of burgeoning supply from the US.
Latterly bond prices have gained further support from the launch of a Quantitative Easing (QE) programme by the European Central Bank (ECB), which sent German 10-year Bund yields plummeting to a low of just 0.16%.
One especially persistent trend has been the strength of the dollar, which continues to be supported by the view that the Federal Reserve Bank (the Fed) will be the first major central bank to raise interest rates in the next cycle.
Given that US interest rates were last raised in July, 2006, markets will become more apprehensive as the announcement gets closer. Rising interest rates will represent a journey into the unknown for many.
A current factor peculiar to the UK is the looming General Election. Although we remain of the opinion that its outcome will have little bearing for equities on anything but the shortest term view, a victory (or at least plurality) for either main party would present uncertainty.
Labour are seen as less business-friendly and have threatened to raise corporate taxes, whereas the Tories promise a referendum on our membership of the European Union, which threatens to destabilise business investment from overseas.
Investment success in the last year has all been about “not blinking” when faced with a number of threats, ranging from economic to geopolitical.
Our view has been, and remains, that reflationary forces will continue to dominate for the present, even if valuations are becoming less accommodating.
Undoubtedly, future return prospects are diminishing on that basis, but we are far from dismissing future positive growth surprises, particularly from emerging market middle class consumption and corporate investment, which has been below average since the financial crisis.
We continue to urge investors to refrain from looking at future investment return prospects through the lens of the last six years, a period during which we have stepped back from the financial abyss, seen equity valuations recover from unconditionally cheap levels (even if it was hard to believe that at the time), and witnessed fixed income and deposit yields crushed by central bank intervention.
Equities remain our preferred asset class for long term investors, and should also benefit from the continuing search for yield.
However, we are uncomfortably aware that they will not be immune to higher discount rates as and when that happens.
We also envisage greater volatility ahead for risk assets and currencies, not least because of the divergent paths of monetary policy between the US and most of the rest of the world.
Having said that we continue to see market dips as just that, and not the harbinger of a new bear market, and will be looking for such opportunities to commit funds to our favoured investments.
It is not yet time to be aggressively defensive, although the long sweep of history informs us that such a moment lies ahead and we must remain vigilant to such a threat and look to preserve the outstanding gains that we have made in recent years.