Brooks Macdonald Market Update

It has been an interesting start to the year with January being one of the strongest months on record for equities. However, you will have seen Global equity markets fall sharply in early February and market volatility, a gauge of investor fear, rise significantly.

January was the 15th consecutive month of gains seen in the US index, with the optimism created by the Trump Tax reform many indices began to price in a significant amount of good news and by the end of the month some indicators were suggesting the market was overbought.

We believe a significant amount of this recent move is attributable to investors selling risk assets after an extremely long tick up in equity markets amidst very low volatility – this is a healthy feature of a bull market.

Our core view for 2018 remains unchanged, we expect inflation to tick up in the US towards the Federal Reserve’s target but for structural disinflationary pressures, such as technological improvements, to keep inflation under control. Corporate earnings growth has been positive and we note that of the US companies that have reported Q4 earnings, three quarters of them have exceeded analyst expectations and many have guided that 2018 will be better for their companies than the market is pricing in. The key area we will be watching is whether wages carry on rising or whether this is merely bringing wage prices in line with where the US Federal Reserve wants them to be.

In summary we still believe equities are more attractive than bonds but are focusing on ensuring that portfolios are balanced in 2018 which we expect to be more volatile than recent years. Similarly in the non-equity space we are looking to alternative asset classes to help dampen the inherent volatility of equity markets.

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