During one-month period to 30th November 2019, major equity markets registered gains. The FTSE ALL-World Index rose by 2.8% over the period, now up by 21.3% since the beginning of the year. The VIX index fell by 8% to end the period at 12.44, a rather “complacent” level by historic standards. Most fixed interest products fell, in price terms, during the month. Sterling was stronger versus the Yen, but otherwise moves were small. The Chinese Renminbi stayed reasonably stable versus the US dollar as trade talks continued. Commodities displayed a mixed price performance overall.
The European Central Bank saw changes in leadership although the debates about reviving growth,environment,pan-European initiatives etc are expected to continue. At the time of writing Germany appears to be on the brink of a recession and calls for fiscal loosening are increasing. Political events have featured further signs of discontent in Germany(coalition split?) and France, renewed Spanish election speculation, and inevitable squabbling re the EU (ex-UK?) Budget. US market watchers continued to grapple with ongoing tariff discussions (China, and prospectively Europe), Federal Budget concerns, Iranian sanctions, Venezuela, North Korean meeting stalemate and Trump’s personal issues (impeachment?). US economic data has indicated a solid consumer trend although relatively buoyant first quarter GDP growth figures did include a large element of inventory building and more recent official figures have been mixed. Corporate results/forward looking statements have taken on a more cautious tone, especially related to tariff developments (actual or rumoured). Official interest rates have been reduced three times to a range of 1.5% to 1.75%, much as expected, and a “pause” was indicated by Fed Chairman Powell at the recent meeting. In the Far East, China flexed its muscles in response to Trump’s trade and other demands, but anecdotal evidence points to a steadily weakening economy. Recent data releases pointed to 6.0% quarterly GDP growth with risks growing to the downside. Hong Kong remains still very volatile. Japanese economic growth was downgraded slightly to 0.8%, mainly on a weaker trade performance. The recent Upper House election result confirmed the LDP current strong position while at the Bank of Japan meeting, the current easier fiscal stance was reconfirmed, although the scheduled October 1st VAT increase has been applied.
The UK continued to report somewhat mixed economic data with stable developments on the labour front but poor corporate investment , volatile retail sales, inflation a little higher than expected, weak relative GDP figures and deteriorating property sentiment, both residential (esp London) and commercial (especially retail). Figures announced just yesterday (30th November) by the CBI show historic and prospective output falling by about 10%.Business and market attention, both domestic and international, is clearly focussed on ongoing BREXIT deliberations under new Prime Minster, Boris Johnson. Both the Chancellor and Bank of England Governor have made frequent references to the unsettling effects of any unsatisfactory Brexit outcome, as have a growing number of business leaders and independent academic bodies. The actual situation remains very fluid, and at the time of writing, an election looms in less than a fortnight. Political factors aside, economic and corporate figures will inevitably be distorted over coming months, and it would not be a complete surprise if UK entered a technical recession soon. GDP growth of a mere 1% or less for full year 2020 looks very likely.
Aggregate world hard economic data continues to show 2019 expansion of around 3.0%, although forecasts of future growth continue to be reduced the leading independent international organizations. As well as slowing projections in the developed markets of USA, China and Europe, a number of developing economies are experiencing headwinds for a variety of reasons e.g. India and much of Latin America There appears to be a growing chorus of further action on the fiscal front e.g. infrastructure spending, as other instruments e.g. interest rates may have limited potential from current levels. Fluctuating currencies continued to play an important part in asset allocation decisions, sterling/yen being a recent example, while some emerging market currencies have been exceptionally volatile e.g. Turkey. Movements in the $/Yuan are also taking on increasing significance
Equities
Global Equities rose by 2.8% over November, the FTSE ALL World Index now showing a gain of 21.25% since the year end, albeit following the very weak last quarter of 2018. The UK broad and narrow market indices, both advanced by under 2% over the monthly period, lagging world equities in sterling adjusted terms by about 10%, since the beginning of 2019. Along with the UK, Asia and Emerging Markets lagged during the month while USA and Continental Europe showed above average gains. The VIX index fell, reflecting a greater risk-taking mood to a level of 12.44, and down 51.06% since the beginning of the year.
UK Sectors
A mixed month for Uk sectors with some of the more traditionally “defensive” sectors such as pharmaceuticals, telecoms and utilities lagging while industrial, consumer and real estate stocks rose by over 4%. Over the eleven -month period, industrial shares are showing an absolute gain of over 24% while the worst performing UK sectors, oil, banks and telcos are still in negative territory.
Fixed Interest
Gilt prices fell over the month, the 10-year UK yield standing at 0.56% currently. Other ten-year yields closed the month at US, 1.75%, Japan, -0.14%, and Germany, -0.36%. UK corporate bond prices also fell slightly over the month, and more speculative grades showed larger price falls. Floating rate bonds rose while the favoured convertible bond was redeemed, as expected, after showing a year to date return of about 10%. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds, speculative high yield etc. A list of my top thirty income ideas (many yielding around 6%) from over 10 different asset classes is also available to subscribers.
Foreign Exchange
Sterling was the main mover amongst the major currencies during November largely on political news. Since the beginning of the year, sterling has appreciated more than 5% against the Euro. As ever, FX decisions remain crucial in determining asset allocation strategy. See my recent note regarding various Japanese strategies.
Commodities
A mixed month for commodities on global growth concerns and supply shocks. The oil price advanced, while gold fell 2.5%, and industrial metals were a little firmer. Palladium advanced 2.52% taking its year to date gain to 44.3%
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements meeting, will continue to dominate news headlines and market sentiment, in my view. In contrast to previous years I would expect December to be particularly “noisy” in market terms. To some extent, the slower economic growth forecasts that are appearing, will inevitably lead to some scale-back in corporate profit projections, although there may be offsetting fiscal and monetary effects. With growing numbers of government bond yields in negative territory, calls for more fiscal action will intensify.
US watchers will continue to speculate on the timing and number of further interest rate moves during the 2020/2021 period while longer term Federal debt dynamics, election debate and trade” war” winners/losers (a moving target) will increasingly affect sentiment. Corporate earnings growth will be subject to even greater analysis, amidst a growing list of obstacles. Additional discussions pertaining to North Korea, Russia, Hong Kong, Ukraine, Iran, and Trump’s own position(impeachment) could precipitate volatility in equities, commodities and currencies. In Japan market sentiment may be calmer after recent political and economic events although international events e.g. exchange rates and tariff developments, will affect equity direction. Economic data, has, pointed to sluggish growth, with persistently low inflation and a trade war with USA has been averted (for the time being). There is increasing speculation that China may announce more stimulative measures and key $/Yuan exchange rate levels are being watched closely. European investment mood will be tested by generally weakening economic figures and an increasingly unstable political backdrop.
Hard economic data (especially final GDP, corporate investment, exports) and various sentiment/residential property indicators are expected to show that UK economic growth continues to be lack-lustre and any economic upgrade over current quarters appear extremely unlikely. The UK Treasury and the MPC have both produced rather negative economic medium-term projections, whatever the Brexit/political outcomes! It is highly likely that near term quarterly figures (economic and corporate) will be distorted (both ways), and general asset price moves will be confused, in my view, by a mixture of currency development, political machinations, international perception and interest rate expectations. There could be scope for extreme sector/style/size volatility during the immediate Election period…providing risk….and opportunity.
In terms of current recommendations,
Depending on benchmark, and risk attitude, first considerations should be appropriate cash/hedging stance and the degree of asset diversification (asset class, individual investment and currency).
An increased weighting in absolute return (but watch costs, underlying holdings and history very carefully), alternative income and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate, including some outside sterling. Both equity and fixed interest selection should be very focussed. Apart from global equity drivers e.g. slowing economic and corporate growth and limited monetary response levers, there are many localised events e.g. UK, election and US tariff discussions, political uncertainty, that could upset many bourses, some still relatively close to recent record levels.
- I have kept the UK at an overweight position on valuation grounds. Full details are available in the recent quarterly review. However, extra due diligence in stock/fund selection is strongly advised, due to ongoing macro-economic and political uncertainty. Sterling volatility should also be factored into the decision, making process.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, Telco’s and Utilities have attractions relative to certain cyclicals, though watch regulatory concerns, and many financials are showing confidence by dividend hikes and buy-backs etc. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Differing electoral outcomes are likely to impact sectors,styles,size in many ways.
- Continental European equities are preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments and slowing economic growth need to be monitored closely. I suggest moving the European exposure to “neutral “from overweight. European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully and remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the 2017 and 2018 outperformance relative to world equities. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.FX will play an increasing role in the Japanese equity decision.
- Alternative fixed interest vehicles, which continue to perform relatively well, in total return terms, have attractions e.g. preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk e.g. EnQuest,Eros. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. Bank balance sheets are in much better shape and yields of 6%-7% are currently available on related issues while a yield of 9.1% p.a., paid quarterly, is my favoured more speculative idea.
- Alternative income and private equity names exhibited their defensive characteristics during 2018 and are still favoured as part of a balanced portfolio. Reference could also be made to the renewable funds (see my recent solar and wind power recommendations) which continue to outperform in total return terms. Selected infrastructure funds are also recommended for purchase but be aware of the political risk. New issues in this area e.g. Aquila and JPM are likely to move to larger premiums.
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g. (Hammerson, Intu). Subscribers may read more on this subject in my latest quarterly review. One possible exception to the sentiment above is the growing attractiveness of certain assets to overseas buyers. The outlook for some specialist sub sectors e.g. health (PHP equity and bond still strongly recommended), logistics, student, multi-let etc and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property plays e.g SERE.
- I suggest a very selective approach to emerging equities and would continue to avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. It is worth noting that several emerging economies in both Asia and Latin America have shown first quarter 2019 GDP weakness even before the onset of any possible tariff effects. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term and much of South America is either in a crisis mode e.g. Venezuela, Argentina or embarking on new political era e.g. Mexico and Brazil. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years, and there are currently large inflows into this area following the price weakness of 2018. One additional factor to consider when benchmarking emerging markets is the large percentage now attributable to technology. A longer-term index argument is also being made in favour of Gulf States, although governance issues remain a concern.
Full quarter report available to clients/subscribers and suggested portfolio strategy/individual recommendations will be available soon. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, defensive list, hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
1st December 2019