Investing for retirement in today’s volatile environment

As the first quarter of 2018 draws to a close, we’ve witnessed increased global market volatility after the relative calm of recent months. This volatility picked up largely due to the potential for faster US interest rate increases. As investors, it’s important to understand what is happening in world economies, how global financial market volatility can influence your portfolios, especially as you save for retirement, and consider what may help you weather future periods of uncertainty.

The US must exercise caution in its rate rise plans to prevent an abrupt slowdown

If the US Federal Reserve (Fed) raises interest rates three or four times this year, then mortgage rates are likely to rise strongly. This could dramatically reduce consumer spending and abruptly slow their economy – not something the Fed is likely to want to precipitate.

Accordingly, it is likely that the Fed will proceed cautiously and only raise rates if economic data remains supportive. The increase in the US Government’s borrowing requirements has the potential to push up long-end rates even further than seen to date. This will be driven by increased supply of new bond issuances to fund government spending, at a time when the Fed is unwinding its bond holdings built up through its quantitative easing (QE) approach to stimulate the economy, potentially leading to oversupply in bond markets. The political uncertainty that regularly breaking the US Government’s debt ceiling creates, also causes uncertainty for investors, and typically results in them demanding higher rates to invest in bonds.

For now, we believe the world’s major economies are in a reasonable state and growing well

In particular, we see no signs of recession yet in the US, but surely one will eventually come, due to the nature of economic cycles. However, nothing at present is indicating this is imminent despite the length of the current economic expansion. US interest rates are on an upward path, while US equity markets are fully if not highly valued and somewhat supported by increases in predicted earnings (i.e. from corporate tax cuts), but not supported by a rising interest rate environment.

Unwinding of QE by all the major global central banks (the Fed, Bank of England, European Central Bank and Bank of Japan), while mooted, has not yet begun – if implemented according to the best guess schedule, the effects will not actually be felt until early next year; and when it happens, it could affect asset prices. Just as the implementation of QE inflated asset prices, its removal, even slowly, will likely have some deflationary impact.

US inflation is rising and, historically, this has tended to worry markets – but there are checks

There are many factors operating to keep inflation in check, such as demographics (falling workforce growth) and technology. The US dollar will likely be supported by increased US interest rates and its strong economy. In times of stress, the dollar is seen as a safe haven, so it generally strengthens; when global investors are feeling bullish and inclined to take risk, it will weaken.

Markets do not move in straight lines. The rally seen in equity markets over the last year is highly unusual in its lack of volatility, and as such, the current conditions provide a good time for you to review your portfolio and strategies. We continue to recommend that as an investor, reviewing your portfolio to see if it is well-diversified and holding a good proportion of cash can help you weather periods of volatility – and may allow you to take advantage of some opportunities caused by volatile markets.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward-looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Patrick Broughton

Investment Committee Chairman

With 25 years’ global investment banking experience in a broad range of financial markets, including equities, fixed income, hybrids and convertibles and foreign exchange, Patrick Broughton is charged with chairing the Dixon Advisory Investment Committee.

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