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Markets – concerns around growth

Current movements in the market appear to be more than a whimsical sector rotation, says Anthony Rayner, manager of Miton’s multi-asset fund range

Markets continue to gyrate but pinning down the precise cause remains tricky. In a sense though, the cause is only really worthwhile pursuing if it continues to be a force which drives markets. With that in mind, there are two dynamics currently dominating, both related. One is a tightening of monetary conditions, with US interest rates moving higher and, more generally, central banks exiting quantitative easing and entering quantitative tightening (QT). The second is a concern about slower growth.

QT heralds a new era for financial markets: a more demanding environment generally, but also one which will see asset class behaviour change, relative to their own history and relative to other asset classes.

In terms of slower growth, economically sensitive businesses have been underperforming more defensive businesses since the beginning of June this year. More specifically, since June, materials, financials and industrials are the worst performers, while healthcare, utilities and consumer staples are the best performers, and are the only three sectors in positive territory.

This feels like something more than a whimsical sector rotation, due to its persistency, in terms of duration, and that it continued during both rising markets and through the recent sell-off, and its scale.

This suggests markets are worrying about growth and is consistent with evidence of a slowing US housing market and slowing US money supply growth, while the global PMI manufacturing survey has been moving consistently lower since April (though remains well above 50, a level consistent with recession).

Bringing these two dynamics together, tighter monetary conditions would be expected to provide headwinds for growth. That said, if US growth slows materially that will lead the Fed to raise rates less aggressively, assuming inflation doesn’t tie their hand. Stepping back, what practical portfolio construction steps can we take if the environment is to be characterised by higher volatility and lower returns?

Within equity, we’ve been adding to defensive sectors where there’s evidence of share price momentum, like pharmaceuticals, infrastructure and utilities. We have a preference for value too, with less exposure to mean reversion risk. Turning to bonds, we continue to believe they’ll be hurt by rising rates and inflationary pressures, and expect little shock absorption benefit (as yields are already compressed), and so we remain short duration across our bond portfolios. Elsewhere, we’ve been adding to property, for example in Japan, adding to gold exposure and holding elevated cash positions, until we get more visibility.

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