Market review: what to focus on in volatile times

Andrew Milligan

With news headlines, such as those around Brexit, continuing to cause confusion and uncertainty, it’s a good time to step back and consider what’s really important. Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, looks at the main issues we should pay attention to and the areas we may be able to learn from.

Top three things for investors to consider

There’s a divergence in the world economy. Certain countries, such as Germany, and certain sectors, such as manufacturing, are going into recession, with the slowdown in global trade having a major effect. On the other hand, consumer spending is growing well in most countries, with service sectors holding up – travel and leisure are prime examples.

So the first factor to consider is whether manufacturing will pull the rest of the economy down or whether it will eventually recover if the rest of the economy holds up.

Business and consumer confidence will have an impact on the outcome, so politics is the second issue investors should pay attention to. Will opinion polls and the threat of impeachment in the US encourage or discourage President Trump to be more conciliatory, for example in trade talks? Will Brexit tensions pick up or die down, and will they have as big an impact on Europe as on the UK? Will tensions in the Middle East die down? These are just some examples of the many political issues that may affect business and consumer confidence.

The last thing to look at is interest rates. We’ve had a series of interest rate cuts in the major economies in recent months. Do these simply help existing borrowers survive a difficult period, or do they actually encourage more borrowing, for example to buy cars and homes, or to invest in businesses? And were the cuts a case of too little too late, or enough to support global growth going into 2020? Eyes are on economic reports, especially for employment and business investment.

We also need to focus on how companies are being valued

Of course we need to look at economic data, understand what central banks, such as the Bank of England and the US Federal Reserve, are planning, and consider company cashflows. We also need to understand who is buying and selling shares in companies, and why. And we need to consider if there’s too much confidence or, on the flip side, too much pessimism. This can help us decide whether any market falls will be short-lived or pick up speed.

For example in December 2018, investors were very negative about opportunities, but then good economic news prompted a rebound in share prices. The latest surveys of fund managers still suggest that many are concerned – we think overly concerned – about the outlook for the world economy and company profits. This has meant cash levels have built up, and are there to be invested once the outlook is clearer.

Areas we shouldn’t forget about

There’s been so much attention on the relationship between the US and its major trading partners in Asia and Europe that many investors forgot there are other areas of stress too. For example, one of the worrying events recently was the drone strike on the oil facilities in Saudi Arabia.

While the impact was short term, it was a reminder how vulnerable the area is to military conflict. On this occasion the damage to the supply of oil from Saudi Arabia was contained and plants should be back on stream in a few weeks, meaning there shouldn’t be any long-term impact on oil prices. But next time may be different – how vulnerable could the Middle East be to a larger military attack?

Another surprise came from the structure of US interest rates. The US Federal Reserve has been lowering its official rate as a way to stimulate economic growth. But some short-term interest rates recently jumped up to 10%. The reasons for this are highly technical, and the Federal Reserve has quickly taken action to control the situation, but it has raised questions about the need for long-term action to stabilise parts of the financial system in the US.

Eyes are on company profits

In previous market reviews, I’ve talked about the slow pace of economic growth in the major world economies. Organisations such as the International Monetary Fund and the Organisation for Economic Co-operation and Development have already lowered growth forecasts for 2020.

What does this mean for company profits? Can firms keep a tight control on their costs? Will domestic demand for products and services help overcome any fall in demand from overseas? Going into the autumn, we’ll be looking very carefully at company reports and forecasts on earnings and profits.

We’re still relatively upbeat and continue to be positive about many equity markets – including the US, Japan and emerging markets, but not the UK and Europe – and positive about various bond markets too, such as emerging markets. This is because we believe there will be slow growth but not a wide-ranging recession while investors need income in a world of low interest rates.

A climate of change

Companies see climate change as a risk but also an opportunity. Several large companies, including Amazon and Google, have announced that they’re committed to invest significantly more in green energy plans. We’re seeing much more interest in this area both from company management and from investors. More firms want to show their ‘green‘ credentials, or are responding to pressures from both private and business investors.

Climate change may not yet be having much effect on markets as a whole, but for individual sectors – energy, utilities, transport, insurance, to give just a few examples – it’s rising up the list of topics which our investment analysts want to research and discuss with senior management. We’re writing about this regularly in our Global Outlook publication – and the October edition is all about environmental, social and governance (ESG) issues.


The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in.

Information is based on Aberdeen Standard Investments’ understanding in October 2019.