Appian Road Q3 2018 Update
As we enter the latter part of 2018, the US market, by and large, has continued on the trajectory of gradual rate increases.
The fed rate now stands close to 2.25% with a strong likelihood of a further uptick at the end of the year. While the absolute value of the rate is minimal, the path forward is material and as the market prices in further increases, we must start to consider that we could be now entering the latter part of the business cycle.
With rates increasing and, in-turn, borrowing decreasing (at least theoretically), we should expect a cooling of sorts. The timing of this “cooling” is anyone’s guess but it is not as far as it was a few years back.
With that being said, across the world, the increased rates have taken their toll on emerging markets. Given the fact that a lot of the debt issued across these markets is in USD, as rates have increased across the yield curve in the US, also the cost to service this Debt has increased.
This has led to a large fall across EM markets.
Additionally, the upcoming mid-term elections in the US are a key focal point as we enter the 4th quarter and with a potential shift of parties in Congress, we do expect some potential volatility.
And, it will be interesting to see where BREXIT finally lands. Will there be an amicable ending to the UK / EU partnership? And with it a potential strengthening of the pound or difficult separation hampering world trade…
As we look at our portfolio in this part of the business cycle, we expect our inflation assets to outperform – especially the inflation linked bonds and commodities.
While inflation is still relatively subdued, the expectations for it have increased. Stay disciplined as always and focus on your goals as they relate to your risk expectations.
We hope the summer has treated you well and wishing a lovely Fall!
-Dar & Davide