Volatile start to the year offers opportunity for investors

The UK has seen another downward revision in the economic growth forecast for the current year, to the lowest level since the financial crisis

IT scarcely seems possible that we are almost half way through 2018. In terms of the UK market we have seen a somewhat volatile six months, with a strong start in January – a continuation of last year – giving way to a sharp slide at the beginning of February, followed by it inching lower still in March and recovery in April and May to reach a new peak, since when it has seen a period of consolidation. The US market (as measured by the S&P 500) also saw a sharp decline in February and although it has seen some recovery, it has yet to recover the high reached at the end of January.

Such market volatility does of course offer opportunities for investors, but it is, as ever, hard to look ahead with any certainty. Although we have seen a positive picture for the UK and the US in May, it has not been the same elsewhere: the Italian market, for example, was badly affected by the political instability and concerns over its commitment to continued membership of the Eurozone. Germany saw a somewhat uninspired month, finishing fairly flat and both Japan and Hong Kong gave up ground. Other notable measures were mixed: oil was strong, having crept up again to briefly reach $80 a barrel, but gold was surprisingly neutral, trading in the middle of its range.

The global backdrop is, however, far from reassuring, but market observers appear to have become a little inured to the vagaries of geo-political drama. Over recent weeks we have seen a stormy G7 summit, which has damaged relations between the US and a number of close allies (Canada being the most notable) and also renewed fears of a trade war between the two largest economies, the US and China, with both so far showing no signs of backing down. In the meantime the UK has seen another downward revision in the economic growth forecast for the current year, to the lowest level since the financial crisis. The US is now facing gradual increases in interest rates, although these seem set to be modest and as a consequence, there are predictions that companies with lower debt and higher cash flow will outperform, possibly bringing an end to the bull market in highly leveraged US companies. The UK, in contrast, does not seem likely to increase rates in tandem: inflation remains subdued and growth, as already mentioned, remains muted.

How has all of this translated into relative performances of the stock markets? For the first four months of the year, the FTSE 100 underperformed the S&P 500, even with the sharp recovery in March and April, although since then it outperformed in May only to fall back again in June. The correlation between the two markets is strong (hence the saying “New York sneezes and London catches a cold”), but it appears that the US is pulling ahead of the UK certainly in terms of continued strong economic growth, hence it will be interesting to map the relationship between the two markets for the remainder of the year.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.

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