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Your Capital Market Assumptions and Summary: January 2019

Author: Chet Velani
12 February, 2019

From Brexit to bumpy landings, the markets have seen plenty of action over the last couple of months. Every quarter, we use our asset model to provide capital market assumptions.

You can watch our Senior Asset Consultant, Salman Ansari, discuss this quarter’s results. Then read on for a brief synopsis of the report’s commentary and download the full report.


The economy and markets

The arrival of an economic slowdown has been predicted for a couple of years now. Yet the journey is beginning to get bumpy. Despite a gentle trajectory, the landing is showing signs of getting rough. Some of the turbulence is due to active interference from politicians – like Brexit and President Trump’s trade wars. However, some areas – China and Germany for example – are finding trouble all by themselves.

This discomfort has started to make itself shown on the markets. The biggest crunch has happened in the US bond markets, where American interest rates are almost at the brink of inversion – the point where short-term interest rates are higher than long-term. In the US, this is a reliable sign of impending recession – but whether it is at the moment is being hotly debated.

Overall, interest rates are down everywhere. In the UK, the ten-year rate has dropped by a fifth and gilts are yielding less than 2%.

Equities broke a long period of calm in spectacular fashion. US shares were down nearly 20% by Christmas, and most developed markets had similar issues. Apple in China had bad news, as did Facebook – and even Amazon and Netflix wobbled.

Whether despite Brexit – or because of it – the FTSE slightly outperformed most of its peers. However, it’s languishing at levels first seen 20 years ago and is forecast to pay out 5% in dividends next year. It’s an astonishing amount when bond yields are barely a quarter of that.

A word about Brexit

Despite the Brexit clock reaching 10pm, the situation is even less clear than it was after the Chequers meeting or following the draft Withdrawal Agreement discussions.

A huge amount of uncertainty needs to be resolved in under two months – and we won’t pretend to know what’s going to happen. However, we’ve made several assumptions against which we’ve prepared this update:

  • Markets are jumping to the conclusion that there will be a deal.

  • Due to the deadline, lack of agreement and challenging politics, there’s a significant chance of an accidental and disorderly no-deal exit, which is not necessarily well discounted.

  • In the short-term, most UK portfolios will be relatively resilient.

You can read more about our assessment of the market view and our modelling regarding Brexit in the full update.


On average, our expected returns have followed interest rates down. But the significant repricing of equities has softened the impact.

UK equities had the strongest relative improvement in outlook. However, it remains to be seen whether this is because the market has taken too little or too much notice of Brexit. It’s our view that in equity markets, valuations and the volume of overseas revenue provide a significant buffer against even quite severe problems.

Download your copy of our Capital Markets Assumptions report now.

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