Q2 2018


John Butters, Chief Investment Officer

Global stock markets started the year on a sour note, but the second quarter has seen quite a turnaround, with markets returning almost 7%, leaving them up about 2% for the first half. Most of our clients’ portfolios are now flat-to-up for the year to date. Markets have climbed a wall of worry for the last two years and, indeed, ever since the low point of the financial crisis in 2009. Once again the year began with widespread scepticism, with the US a particular concern. But markets have been merely mediocre and the US has been the best performer, rising about 5% in sterling terms: yet another reminder that most short-term predictions turn out to be wrong.

A prediction in which everyone seems to have remarkable confidence is that a no-deal Brexit would do untold damage to our economy. Well, it might. But there are reasons to be sceptical. First, economists have barely any ability to predict the future. Think of the Treasury’s forecast that the mere fact of a “leave” vote would cause a recession. That was based on a popular model grounded in “dynamic stochastic general equilibrium” thinking – an intellectual torture that I once endured. Even the very best of these models can account for only about 8% of the variation in growth (see Edge & Gurkaynak 2011, if you think you can bear it). Economists’ predictions should be taken with a truckload of salt. Second, as Mr Trump is now discovering in respect of China, disruptions in trade can be offset by movements in currencies (the Chinese currency is down about 9% vs. the dollar since its peak in April). Sterling fell after the Brexit vote, and could fall again in a no-deal scenario, helping the economy.

It is hugely frustrating that the future is so horribly unpredictable. But there is a solution: simply diversify. Whatever happens with Brexit, it will likely not be the biggest factor affecting the companies you own in the USA, Japan or Brazil. We don’t know if the Brexit basket is going to get dropped, and we don’t know if the eggs will break if it is; but we do know that not all of your eggs are in it.


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