Commentary on June 2019
Global equities delivered their best June on record, and government bond yields fell to new lows, as the United States and China announced a (temporary) truce in their trade dispute and central banks returned to a monetary easing bias. In sterling terms, Asian and emerging markets led the way with gains of 5-7%, and US and European shares rose by over 4%. In the UK the ongoing political situation and Brexit uncertainties led to a disparity between shares with overseas earnings, which rose by around 2%, and domestically biased shares which showed small losses.
Even as US stock-markets soared to record highs, President Trump stepped up attacks on the Federal Reserve Bank for not cutting interest rates fast enough. Oblivious to the irony, he also criticised the European Central Bank for weakening its currency by promising to loosen monetary policy if and when necessary. In what is becoming a predictable pattern Trump agreed a truce with China, putting further tariffs on hold, but opened up fresh disputes with India, Iran and the European Union.
As the US economic expansion officially became the longest on record, focus centred on the deterioration in forward-looking surveys around the world; in some countries these implied an economic contraction. In the UK, the weighted measure of all three indexes (manufacturing, construction and services) pointed to negative growth over the past quarter.
President of the European Central Bank, Mario Draghi, gave his clearest indication yet that the Bank would launch another round of stimulus if the climate of weak growth and political uncertainty continued. The US Federal Reserve said that it would “..act as appropriate to sustain the expansion,” using further language to ready the market for a cut in rates following their July meeting. Government bond yields collapsed as investors predicted a future of easy money and lower interest rates. Were you to lend the UK government money for 10-years, then you would currently get paid 0.66% in annual interest (less than the official borrowing rate of 0.75%)!
Asset markets are sending mixed messages with strong rallies from both risk-on (shares) and risk-off (bonds and gold) instruments. Investors give the impression of being simultaneously confident in future corporate earnings yet worried about a global recession!
Using F.D. Roosevelt’s the “Only Thing We Have to Fear Is Fear Itself” might be making light of a serious situation, but it does feel as though we’re collectively worrying ourselves into recession. The most common reason given for falling sales and order books, cancelled investment projects, and generally lower data is ‘uncertainty’, whether it be Brexit-related or the expanding threat of protectionism and trade disputes. Uncertainty over Brexit, and UK politics in general, was the cause for the UK almost certainly showing negative growth for the past quarter; it’s hard to see any positive news that will lift growth over the next three months, which could then put us in a technical recession (two consecutive quarters of negative growth).
Central banks have been persuaded to abandon their move to normalise markets and allow investors to make up their own minds on market valuations; after that ‘experiment’ provoked a sharp fall in prices last winter, the banks have returned to their previous policy of monetary stimulus. The last episode of monetary easing would suggest that asset prices will be driven ever higher as investors seek an income stream above that offered by cash deposits. This may prove to be the case, but we see most markets as discounting a lot of good news and we remain cognisant of the risks lurking close to the surface.
Arguably the greatest risk is the erratic and unpredictable Trump Twitter feed; with no concept of economics, and with policy dictated by an election timetable, the President is almost single-handedly generating the global uncertainty that is wrecking growth. Further risks to asset prices include central banks not following the bond market’s implied path of interest rate cuts, and the ‘risk’ of stronger economic data. For example, at the time of writing, better than expected US employment numbers have knocked 200 points off the US index and sent bonds and gold lower!
How are we currently positioned?
With the fall in bond yields to new lows, we further reduced our exposure to interest rate risk by changing a couple of bond funds on our cautious and balanced portfolios. 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 still believe that the UK stock-market offers better value than most other markets. The risks are well-rehearsed, but the market has been unloved for a long time now and prices take account of much of this.
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.