Commentary on December 2018
Further stock-market turbulence saw US indices suffer their worst December since the Great Depression in 1931, falling 9% in sterling terms. Shares in UK and European companies fared slightly better, falling by 3-5% whilst Asian and emerging markets out-performed. For 2018 as a whole, the US held on to a 2% gain but Asian, UK and European stock-markets all fell by 9-10%.
UK government bonds ended the month around 2% higher, but bonds issued by companies were tainted by the risk-averse sentiment and ended broadly unchanged. Over the year, UK government bonds were flat, corporate bonds fell by 2-3% and some overseas bonds rose in value, in sterling terms.
On the economic front there was a dichotomy between forward-looking industry surveys, which showed growth but at a slower pace, and the backward-looking jobs data, where strong demand for labour saw wages rising by an annual rate of 3.3%. Inflation remained subdued, reflecting the sharp fall in the oil price.
The US Federal Reserve defied President Trump’s request for no more rate hikes, adding a further 0.25% to interest rates. But their forward guidance suggested no more than two hikes in 2019, and a subsequent press conference in early January portrayed a further softening of their stance, re-assuring investors that the Fed’ was ‘listening carefully to markets’ concerns’ and that it was prepared to be flexible over future policy if warranted.
Governments in the UK and France survived no-confidence motions, although the results might well have differed had the public been allowed to vote! There was no progress in Brexit negotiations and, with the March deadline approaching, ‘No deal’ remains the default position.
There is little dispute that the economic outlook has become less rosy; the growth cycle is fairly long in the tooth and most monthly industry surveys around the world have pointed to a slower pace of growth. But, for now, whilst there are plenty of idiosyncratic concerns, many of these relate to politics rather than economics. The global economy is still growing; the fear is whether trade disputes, rising populism or heavy-handed monetary policy will put an end to it.
We’re not taking the risk of a slowdown lightly, but we do feel that stock-markets were over-due a correction, and whenever this happens investors (and commentators) look around for something to blame. The uncertainty over Brexit has been a long-standing, and justifiable, concern for UK investors, as has the US-China trade row for most global investors. Add to this the rise of populism in Europe and concerns that the US Federal Reserve would over-tighten monetary policy, just as the effects of Trump’s tax stimulus was wearing off, and one could conjure up a pretty bleak picture.
However, our long-standing theme has been that the replacement of monetary easing with monetary tightening would force investors to re-asses market valuations in the light of ongoing political and economic developments. The swing in market pricing isn’t extreme by historical standards, but it has come as a shock to many who had come accustomed to running long positions, supported by central bank action. So, the question isn’t just how the above concerns will play out, but how much bad news has been priced into markets over the past few months.
How are we currently positioned?
We remain overweight UK equities, which have suffered with the Brexit uncertainty, but which we think offers better value than most other markets over the longer term.
Without the support of quantitative easing (QE) we believe there is an even stronger case for choosing actively managed funds over passive alternatives. With returns likely to be harder to achieve, and the risk of more idiosyncratic company ‘mishaps’, active stock-picking and sound investment processes should out-perform.
The Merian Gold and Silver fund benefited from increased volatility across stock-markets, with safe-haven demand driving the price 8% higher on the month.
We remain underweight fixed interest, preferring equities, property and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.