Commentary on July 2019

Market Overview

Due to annual leave, this commentary was written before the month-end and the likely cut in US interest rates. At the time of writing, asset prices have continued their steady assent, fuelled by the prospect of lower interest rates and renewed central bank asset purchases. US indexes made fresh highs as testimony from the Chair of the Federal Reserve reaffirmed their intention to cut rates at July’s meeting; just in case there was any doubt, President Trump intensified the pressure on the Bank to act.

Sterling became the worst performing major currency over the past year as the implications of a No Deal Brexit under new Prime Minister Johnson began to sink in. This flattered gains in overseas stock-markets (in sterling terms) with the US rising by over 3%, Japan, Asia and emerging markets by 2% and the UK and Europe eking out a 1% improvement. Government bond yields held close to their record lows with lower quality bond yields continuing to push lower; the Greek 10-year bond now yields less than 2% compared to 19% in 2015. A further example of this absurdity is that some high-yield European bonds (AKA junk bonds) now have negative yields!

In further evidence of contagion from the on/off trade disputes, China, South Korea and Singapore all showed weaker export and growth data; growth in China, at 6.2% year-on-year, is the lowest since 1992. This is significant because these countries are bellwethers for the health of the Asian economy. The dramatic decline in German manufacturing illustrates the twin uncertainties of future trade with the UK and the possibility of a renewed dispute over tariffs with the US.

The Trump Twitter feed announced tariffs on Mexican and Chinese steel imports, berated the UK ambassador and the US Federal Reserve Board and, more constructively, heralded a bipartisan deal to suspend the U.S. debt ceiling and boost spending levels for two years. This will eliminate the risk of the government missing payments as early as September, which would have had severe economic ramifications and shake confidence in the government-never a good thing with elections coming up.

Our Views

Little has happened during the month to change our view on life. By the time this is published the US Federal Reserve will have cut interest rates, either by 0.25% or 0.5%. The reaction to this, and any accompanying statement, will be interesting but unlikely to be game-changing. The belief for now is that markets are re-entering the Alice in Wonderland world where central bank stimulus guides asset prices ever higher. We’ve already started to see a mixture of income-seeking and Greater Fool theory driving lower-quality asset prices to new highs.

This is the longest US economic expansion on record, but low inflation will allow the Fed’ to cut rates to try and encourage a new global upswing into 2020, which is precisely what President Trump wants. Equally, low/ falling inflation across most of the developed world gives central banks the excuse to ease monetary policy, whether for economic or political reasons.

The risks remain; Brexit negotiations are fast approaching the endgame (again!); global trade disputes ebb and flow but on balance seem to be worsening, with the sub-plot of increasing tension between Japan and South Korea. And Middle East tensions return to the mix with possible ramifications for the oil price.

We see plenty of reasons for caution, and a decent correction at some point, but last time around monetary easing proved to be a powerful tool for asset prices, if not the economy. Our portfolios remain positioned to participate in rising markets but avoid the worst of the volatility when markets fall.

How are we currently positioned?

Gold has been on a recent surge thanks to a combination of falling real yields, geopolitical risk and plans by central banks to ease monetary policy. Our holdings in the Merian Gold & Silver fund are currently up 14% in July.

We remain underweight fixed interest, preferring equities and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.

We believe that the UK stock-market offers better value than most other markets, and recent official data reporting the first net inflow into UK equity funds for two years may be a sign that others are coming around to the idea.

With so much uncertainty around the world, accompanied by record levels of debt, we believe there is a strong case for running well-diversified portfolios, investing in actively managed funds with sound investment processes.