1. Focus: what’s driving markets?

Those of us who were following the markets in the 1990s will remember the power of then Fed chair Alan Greenspan to move the markets. As I write this, I’m looking at a cartoon that I commissioned for the investment newsletter I was then writing with Jim Slater - it showed a bespectacled and caped super-hero (Greenspan) flying in to do battle with three ‘baddies’ labelled Credit Crunch, Bank Failures and Deflation.

That cartoon was prompted by Greenspan’s response to the collapse of the Long Term Capital Management hedge fund in 1998. But he had already swooped to the rescue three years earlier with a series of precautionary interest rate cuts to undo the damage of the 1994 interest-rate tightening cycle which had taken investors unawares and spooked markets.

Today’s investors may be more sceptical about the power of central banks, but this chart argues for their continuing influence. As soon as investors started to think that the next move in interest rates would be downwards, the S&P 500 took off. Jay Powell is not spoken of in the same hushed tones that Greenspan commanded, but he is pulling the same levers as his predecessor with the same apparent success.

 

Interest rate forecasts drive market higher

Source: Refinitiv, 26.6.19.

 

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

Five year performance          
(% as of 30 June) 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
S&P 500 7.3 3.5 17.9 14.5 11.2

 Source: Refinitiv, as at 31.3.19, in local currency terms with income reinvested.

The so-called dot plots of rate-setters’ interest-rate expectations recently confirmed the Fed’s U-turn from last autumn’s tightening bias to its much more dovish approach today. The Fed is now aligned with the market’s forecasts of up to a one percentage point reduction in US interest rates over the next year from their current range of 2.25% to 2.5%. The first cut could come as early as the meeting at the end of this month (July 2019). Along with trade tensions, interest rates will be the principal influence on markets for the rest of this year.

2. Geo-politics - why is the oil price not soaring?

Throughout most of my lifetime, rising tensions in the Middle East have been reflected quickly and significantly in the oil price. From 1973’s Yom Kippur war to both Iraq conflicts, the cost of Brent crude has been the barometer of war and peace in the region. It’s strange, therefore, that investors seem to be taking the current intensification of geo-political angst in their stride. When you consider how close to conflict the US and Iran have seemingly come in recent weeks, the oil price is curiously subdued.

There are a few reasons why this might be the case. The first is that investors don’t believe that Donald Trump is serious about starting a war with Iran. To do so would be to go back on his previously-stated resistance to the US getting involved in overseas conflict. Yes, he enjoys the strong-man bluster, but ultimately he doesn’t see America’s role as the world’s policeman.

The second, and probably more important, reason is that the global oil market remains well supplied thanks to the growth in North American Shale. Cutting a big player like Iran out of the market is no longer as disruptive as it once would have been because the US has become the swing producer, able to fill any gaps that emerge.

Third, trade tensions have contributed to a slowing in global activity. Dwindling demand and ample supply mean the direction of travel for oil in the absence of political tensions would probably be down from here. You could argue that it’s only the Iranian stand-off that is keeping oil at its current price. There are lots of moving parts in the oil price equation today and they are likely to keep the cost of energy in its current trading range of between $50 and $80 a barrel. Right now, we’re bang in the middle of that.

 

Two way pull leaves oil range-bound

Source: Refinitiv, 26.6.19.

 

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

Five year performance          
(% as of 30 June) 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Brent Crude -44.0 -22.1 2.3 56.1 -18.2

Source: Refinitiv, 26.6.19.

 

 

 

3. Gold - the return of the safe haven

Oil may not be responding to rising uncertainty but another traditional port in a storm is. Gold has long been viewed as a safe haven for nervous investors and, as the chart here shows, it has come back into fashion in recent weeks.

There is another reason why the gold price has risen recently. The prospect of lower interest rates in the US has seen the dollar fall relative to other currencies. This tends to be good news for investors in gold because a weaker US currency makes the cost of buying the metal (which is priced in dollars) cheaper in places like India and China.

Having some exposure to gold makes sense even if the metal itself is not particularly useful and it doesn’t generate an income. But what is the best way to gain an exposure?

We usually argue for investing via gold mining shares and the best way to do this is with a diversified fund like the Investec Gold Fund, which you’ll find on the Fidelity Select 50 list. Gold miners are a better way to play the gold price than owning the metal itself because their fixed costs mean that profits rise faster than the gold price - they are geared to a rising price, to use the jargon.

Of course, if you just want a cheap and simple exposure to gold, this can be achieved with the iShares Physical Gold ETC, which features on our Select ETF list of exchange traded funds.

 

 

Gold regains its lustre

Source: Refinitiv, 26.6.19.

Past performance is not a reliable indicator of future returns.

Five year performance          
(% as of 30 June) 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Gold -12.2 15.1 -9.1 1.8 14.2

Source: Refinitiv, 26.6.19.

 

 

 

4. Investing in shares

Exchange traded funds are just one of the instruments that Fidelity investors can now buy and sell on our much-improved share-dealing service. We now offer trading throughout the market session in nearly 1,500 ETFs, investment trusts and company shares.

Investing in individual shares is not for everyone, of course. It requires more analysis (and confidence) than letting an investment professional pick stocks on your behalf. But if you have the time and interest to put together your own portfolio, it can be rewarding, in both senses of the word.

If you are interested in learning more about buying and selling shares, then you should take a look at the new stock-picking game that we are supporting on the This Is Money website. The game started at the beginning of July and runs until late September so there is still plenty of time to get involved.

It’s simple to sign up (there are links from fidelity.co.uk or just go direct to thisismoney.co.uk) and then it’s a matter of a few clicks to choose between six and 20 shares for your portfolio. The game uses live prices, so you can watch in real time how your picks are doing. And, as with fantasy football or cricket games, you can join leagues to pit your wits against other players.

Ultimately, it is a game and meant to be fun. But it is also a great way to test your stock-picking skills and learn about the markets. There’s a £20,000 overall prize and £500 weekly winners too. Terms and conditions apply.

 

 

 

 

5. Fund recommendations - benign backdrop

As promised three months ago, I’m going to review our New Year fund recommendations each quarter. The performance of the four picks is shown in the chart below.

A rewarding first half year

Source: Morningstar, 30.6.19 bid to bid with income reinvested in GBP terms. Excludes initial charge.

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. The Fidelity Select 50 Balanced Fund was launched in February 2018 so full 5-year figures are not available.

Five year performance          
(% as of 30 June) 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Fidelity Global Dividend 8.4 23.6 15.0 1.7 17.8
Fidelity Select 50 Balanced - - - - 4.6
Lindsell Train UK Equity 14.1 6.6 21.1 14.3 13.2
Baillie Gifford Japanese 16.4 9.5 34.6 16.1 0.4

Source: Morningstar, 30.6.19 bid to bid with income reinvested in GBP terms. Excludes initial charge.

 

Obviously, six months is too short a time from which to draw any meaningful conclusions about the performance of this year’s fund recommendations. But, that said, the general direction of travel of the four is encouraging.

The Lindsell Train UK Equity Fund is the best performer, which reflects the ongoing preference of investors for the growth rather than value style. In an uncertain world, the high-quality companies favoured by investors like Nick Train will tend to do well.

In a low interest-rate environment, the hunt for yield will continue so a fund like Fidelity Global Dividend, which balances capital preservation with the search for high and growing income, should remain in favour.

Japan, as I explore in more detail elsewhere in this Outlook, has not really enjoyed the rally this year but the Baillie Gifford Japanese Fund continues to be my favoured way of playing this unfairly out-of-favour market.

Finally, the Fidelity Select 50 Balanced Fund has lived up to its early promise, helping investors navigate unpredictable markets with its diversified selection of top-quality funds from our Best Buy list. If you’re interested in finding out more about the fund, my colleague Emma-Lou Montgomery recently interviewed its manager Ayesha Akbar. You’ll find the interview in the Markets & Insights pages of fidelity.co.uk.

Overall, then, a satisfactory half year report. I’ll return to these four fund picks in the autumn.

 

 

 

 

6. And finally….

One of the big developments in the world of investing at the moment is the way sustainability is going mainstream. The publicity around the recent Extinction Rebellion protests has brought climate change into the news headlines this year but investors like Fidelity have been focusing on the wider environmental, social and governance factors that drive sustainable investment for some time now.

In our most recent episode of MoneyTalk, we focused on the broader topic of sustainability, which is about much more than green investing (although this is part of it). Of course, sustainability is about making the world a better place. But it is also about finding companies that are ensuring their own survival for the long term by doing the right thing by their employees, customers, suppliers and, yes, the environment.

 

Important information

Please be aware that past performance is not a reliable indicator of what might happen in the future. The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets. Reference to specific securities or funds should not be construed as a recommendation to buy or sell these securities or funds and is included for the purposes of illustration only. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a personal recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

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