“Sunny spells with thundery showers”…….. If there is one theme starting to emerge more broadly over the past month or two it is one where risks are heightening within an overall picture that still looks bright.

In last month’s Newsletter we observed slowing economic momentum in Europe and political instability in various guises such as Brexit and Trade/Tariff threats.  While fundamental economic strength remains the base case generally around the world, financial markets seem to look for reasons to correct particularly after periods of strong performance.  Investment managers are mindful then that these geopolitical hotspots on top of hot investment markets that are already on edge in an environment of increasing central bank interest rates are likely to result in patches of high volatility throughout 2018 and into 2019.  Blackrock, in their MidYear 2018 Global Outlook, refers to the “uneasy equilibrium between rising macro uncertainty and strong earnings”.

It’s interesting to see though that even the top well-respected managers are not necessarily in lock step on some of the detail – maybe that is indeed symptomatic of the current environment.  Magellan’s Hamish Douglass caught headlines a couple of weeks ago when he flagged the potential for a serious correction in world markets, while Blackrock actually favours US equities for example over other regions but notes the importance of stock selection. The message once again is that skilled managers aim to take advantage during periods of volatility whereas index investors may just be hanging on for the ride.

In their Quarter 3 Outlook entitled Sunny Spells with Thundery Showers, Fidelity International notes a finely balanced outlook and an elevated level of noise “based on sentiment swings and news flow, although the attraction of prudent long-term security (stock) selection will be unaffected”.    They noted too that sharp market corrections are often preceded by evidence of irrational exuberance but this has not yet been the case in the current cycle. Chart below.

And all this at a time when Apple became the first US company valued at a trillion-dollars…. That’s one million million dollars, or US$1,000,000,000,000.

In line with these opinions, over the past month the Dow Jones index has climbed back up to 25,000+; our ASX200 has had a good run in 2018 and particularly since the drops in February and March to be now sitting up over 6,200 points; while most of the major Euro stock markets reflect the growing sense of unease during 2018 so far with most bouncing around at the levels of 8 to 12 months ago.

Sources:  RBA, ComSec, Bloomberg, Blackrock, Fidelity, Magellan, MorningStar Research.