Kate Marshall, Senior Investment Analyst 15 August 2019
It’s a scary world out there.
Trade wars, populist governments, Brexit, currency volatility, environmental pressures. That's just a handful of what's topping the news agenda at the moment.
I'd forgive you for building a bunker and burying your head in the sand. As an investor, you might be tempted to hoard your cash until things blow over.
But this isn't always the best course of action. There's been plenty to worry about over the past decade and, despite all the drama, global stock markets have generally continued to rise. Even reaching all-time highs in some cases, albeit with some setbacks along the way.
So what exactly has helped drive markets higher?
Firstly, don't forget economics and the stock market are not one and the same. Sometimes they even head in different directions. The strongest companies have the ability to keep growing their profits and maintain demand for their products, whatever the outside world throws at them. If they keep doing well, their share prices are likely to benefit.
Other forces have helped keep markets buoyant in recent years, though.
Central banks across the globe have flexed their muscles in two key areas – interest rates and Quantitative Easing (QE).
In some countries, like the UK, interest rates have been pushed down to historic lows. It means savers have struggled to make much, if any, return on cash in the bank. So those looking to make more of their money, and prepared to take on some risk, have turned to investment markets to try and grow their wealth. This has pushed prices up.
QE programmes have also seen central banks buy large amounts of bonds, aimed to prop up financial markets and stimulate economies. But as bond prices rise, their yields fall. So some investors who traditionally turn to bond markets to satisfy their income needs have invested more in dividend-paying shares, again giving support to markets.
It's not all plain sailing
Last year, investors expected central banks to take their foot of the gas and start to increase interest rates at a gradual pace. It meant markets stumbled towards the end of 2018.
This view changed at the start of 2019, and markets picked up pace again. To the end of July, the broader global stock market grew an impressive 21.8%. Past performance isn't a guide to future returns.
August has been a tougher month so far. An escalation of the US-China trade war, in which the US has proposed tariffs on an additional $300bn of Chinese goods, has shaken markets.
China subsequently allowed its currency to weaken below a key threshold, a level not breached since the 2008 global financial crisis. This could help soften the impact on China of further tariffs from the US, but it's unsettled investors.
Share prices could remain volatile in the short term, at least while we wait for some stabilisation in trade negotiations. Though, as always, we say investors should take a long-term view. Bonds, on the other hand, have done well out of all this because they're thought to be safer in times of uncertainty.
What do the bond experts think?
We recently met a number of bond fund managers who shared their outlook for the economy and bond markets.
Some economic commentators see a global recession looming, but Paul Read and Paul Causer, managers of Invesco Tactical Bond, are more sanguine. They don’t think worldwide growth will be as high as in recent years, instead they see a growth-pause scenario rather than a growth-reversal one. If there is a recession though, they believe it’ll actually be a good thing for most bonds.
They think the US Federal Reserve will cut interest rates further, which should see a rise in bond prices. They also think there’ll be some relief from international trade wars as Trump won’t want any economic trouble leading up to the next US election.
We also met Eric Holt, manager of Royal London Sterling Extra Yield Bond. He notes that $14trn of bonds across the globe now have negative yields – as prices have continued to rise, yields have fallen. It essentially means investors in these bonds aren't getting paid any income, instead paying to lend money to governments and companies.
This might not change any time soon. Holt expects interest rates to stay lower for longer. He thinks we could even see further rate cuts or QE, especially in countries like the UK where a hard Brexit is an increasing possibility. This could help support bond markets, but potentially push yields even lower.
This article isn’t personal advice. If you’re not sure an investment is right for you please take advice. Investments, and any income from them, can fall as well as rise in value, so you could make a loss.