“It’s going to be a tough quarter” – experts warn of uncertainty as we enter Q4

The end of Q3 and start of Q4 have been marred by wobbles across both global equity and fixed income markets.

In the US, following a trade war instigated by President Trump, jitters are impacting not only the FAANG stocks but the indices more broadly.

Across Asian and emerging markets things are looking equally wobbly. China’s reaction to the trade war waged by the United States will be crucial, but so far Chinese equities have come under pressure, with the Hang Seng down 12.5% year-to-date and the onshore A share market off some 17.7%.

Bonds are also in the firing line. Yields on ten-year treasuries have climbed sharply in recent weeks, with returns year-to-date turning negative, as the US’ economic recovery continues apace, prompting expectations of more rate rises.

Meanwhile, the UK remains mired in Brexit negotiations, and as the deadline creeps closer it’s still unclear what sort of relationship the UK will have with the European Union from 29 March next year.

Markets hate uncertainty, and the FTSE 100 has dived almost 10% from its record peak in May above 7,900, currently trading at 7,240 points.

Experts suggest there could be a stock market rally on these shores if Theresa May and her Cabinet are able to walk away with a good deal from the EU. But as things stand, that is looking far from certain.

Commodity markets have also been mixed. Oil has been the clear winner for much of the year and currently sits at around $84 a barrel, having risen by a third in value year-to-date. However, in the face of a strong US dollar, gold remains depressed, and has weakened substantially to trade below $1,200.

How should investors position portfolios with markets so finely balanced? Below three experts give their views on what the next three months holds for investors and how they can capitalise on the uncertain political backdrop around the globe.

Ben Yearsley, investment committee chair at Shore Financial Planning, said:

“It’s going to be a tough quarter for investors. In the UK, the Brexit situation will dictate largely what happens. If we get a conclusion to the negotiations and we get a broadly soft Brexit, then I think the UK market will respond positively and you might get a sterling bounce as well, which would be bad for overseas investments as a UK investor. This is the most important thing for UK investors at the moment.

“I think the US will broadly carry on as it has been: earnings are good, rates are rising, the NAFTA deal is sorted now so everything is going on as before. But if the dollar carries on getting stronger, things will get tougher for Asia and emerging markets. A lot there will depend on whether the Chinese authorities introduce any stimulus. If they do then the Chinese market will shoot up – especially as they already look cheap.

“So, the backdrop is quite mixed. There are lots of different factors influencing different markets. The UK, Asia and emerging markets look cheap at the moment, and if there is a good Brexit deal and the Chinese government introduce stimulus then that could change.”

Adrian Lowcock, head of personal investing at Willis Owen, said:

“It’s a big couple of months for investors. It goes without saying that Brexit will continue to be a big issue in the UK and that will weigh on markets until we get greater certainty about what type of relationship we will have with the European Union in the future. However, if we do get a breakthrough then I can see a rally in the UK market, with share prices rising on the back of the good news.

“With regards the US and China, we have gone from talk of a trade war to the real thing. It depends how Trump plays that and how the Chinese, who are more than capable of standing up for themselves, react as to how that effects the wider market.

“I’m not overly concerned about the slowdown in China but it impacts emerging markets, as does a strong US dollar and growth. So that’s why this is probably the asset class to keep an eye on as it has been fairly volatile recently. Emerging markets look attractive long term, but there are potential headwinds in the short term.”

Colin Dryburgh, manager of the Kames Capital Diversified Growth fund, said:

“All eyes are now on reporting season, with European and UK markets continuing to lag as Brexit negotiations stumbled towards continued uncertainty, and indeed political uncertainty remains the order of the day for now.

“However, there have been pockets of opportunity and we increased our overall equity exposure heading into the final quarter, in particular implementing a new positon in Japanese equities.

“Our largest move was to add to oil stocks as we remain positive on the outlook for the sector given higher oil prices.

“Meanwhile, in debt markets, we trimmed our allocation to emerging market debt and added slightly to bank credit where we see better value.”