Rothschild Private Wealth: Market Perspective — Cause and FX | Technology v.2
Kevin Gardiner, Global Investment Strategist, Rothschild Wealth Management
The return of volatility is unsettling, but overdue, as we've written here often. US pay growth seems to be the immediate cause. In fact, its upturn does little more than restore an earlier trend. But bonds have been expensive. And after 15 straight months of positive returns the S&P 500 didn't really need an excuse to sell-off: stock valuations were also higher than usual. Nonetheless, we have been - still are - braced for reversals, not collapses. In the case of stocks, we think they will eventually be made good.
Currency volatility has also picked up in 2018. Despite its “safe haven” rally in recent days, the dollar has been the biggest loser, extending 2017's fall, and the pound has seen the biggest gains. Should this affect our investment views? We think not - or at least, not yet.
Globally, exchange rates are a zero-sum game, and leave the relative attractions of stocks and bonds intact. Their impact on regional returns can be muted: they can be more effect than cause, which seems the case now.
Dollar-based portfolios offer higher returns - but only in dollars, and they may need to in order to offset local inflation risk. With few dramatic misalignments, we doubt currencies will materially affect longer-term returns.
Meanwhile, the business cycle remains in rude health - hence those inflation nerves. Stocks are most volatile, but the lasting damage if inflation revives will be to bonds. And inflation-linked bonds are not risk-free: keep an eye on real yields.
Finally, with many investors hearing echoes recently of 2000's technologyled boom and bust, we look at how the sector has evolved in the meantime.
Download the full analysis below.
Market Perspective (English version) (PDF 4.8 MB)
Marktausblick (German version) (PDF 4.0 MB)
Perspectivas de mercado (Spanish version) (PDF 4.0 MB)