Investment newsletter - May 2018

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Investment Newsletter May 2018

Cause and effect They say that the economy and the stockmarket are a bit like a drunk and his dog. The drunk weaves around all over the place. The dog is a little steadier and walks his own path. However, they can’t get too far apart because the dog is on a leash. The stockmarket often acts like it is drunk. It can be wildly unpredictable and the correlation to what is happening in the real economy can seem tenuous at best.

Mike Deverell Investment Manager

Equilibrium Investment Management

Take the recent UK economic growth figures for the first quarter of this year, which were unexpectedly weak. You might expect the UK stockmarket to dip on the news but nothing of the sort happened. In fact, the market has generally gone up since the news. For many stocks in the top 100 the correlation can often work like this… Poor economic news = no rate rise for now = a fall in the pound = a rise in the value of earnings made overseas = a rise in share price

In finance we often talk about correlations and knowing the correlation between different asset classes is vital for portfolio construction. One problem with this is that correlations are not constant. Traditionally, government bonds such as UK gilts have been lowly correlated to equities, however this has not been constant. Chart 1 shows the rolling 12 month “beta” of the FTSE Conventional Gilts Index relative to the FTSE All-Share Index of UK equities. Beta is a measure of correlation – a beta of 1 means perfect correlation and so if the stockmarket goes up 10% then we’d expect gilts to go up 10%. A beta of -1 means if the market goes up 10% we’d expect gilts to go down 10%. For most of the time, the beta is between 0.2 and -0.2 – low or sometimes slightly negative correlation. This

Equilibrium Asset Management LLP (OC316532) and Equilibrium Investment Management LLP (OC390700) are authorised and regulated by the Financial Conduct Authority and are entered on the financial services register under references 452261 and 776977 respectively. Registered Offices: Brooke Court, Lower Meadow Road, Handforth Dean, Wilmslow, Cheshire SK9 3ND. Both companies are registered in England and Wales.


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Investment newsletter - May 2018 by Equilibrium Financial Planning LLP - Issuu