Global Market Overview
October was a positive month for global equities as the US and Chinese authorities moved closer towards a partial deal on trade. However, a strong bounce in sterling as the prospect of a “no deal” Brexit outcome on 31 October receded meant that for sterling investors returns from overseas investments were negative. As risk appetite improved over the month government bonds in general moved lower.
*In the Euro Area, the main refinancing rate is 0 and the deposit rate is -0.5 percent
• The Federal reserve cut interest rates by 25 basis points, its third cut this year
• US companies are reporting better than expected results for the third quarter earnings season but continue to give lower guidance for next year’s earnings.
• Eurozone economy expanded by 0.2% defying recessionary fears although other indicators point to ongoing fragility as a result of the global trade wars
• PM Boris Johnson has agreed a new Brexit deal with the EU but a general election is now being held on 12 December.
• The annual pace of GDP growth in China is slowing with the authorities continuing to implement easing measures.
Performance of RPW Models over one month to 31st October 2019
All models declined in value over the course of October. The RPW Cautious model proved the most resilient with a fall of 0.51%. This was followed by the RPW Moderately Cautious model which fell by 0.73%. The RPW Balanced model declined 1.01%, the Moderately Adventurous model by 1.20% and the Adventurous model fell by 1.29%.
Performance of RPW Models over three months to 31st October 2019
Over the past three months, all models have lost ground. The RPW Cautious model proved the most resilient, ending the month more or less flat with a decline of 0.01%. The RPW Moderately Cautious model declined 0.37%. The RPW Balanced model fell by 1.82% with the RWP Moderately Adventurous model declining by 2.50% and the RPW Adventurous model falling by 3.58%.
Performance of RPW Models over one year to 31st October 2019
Over one year, all models have generated a positive return. The best performer was the RPW Adventurous model which rose 9.69%.
(Source: Financial Express Analytics, Total return, gross of fees, as at 30th September 2019).
Please note that these figures are unaudited and indicative. The performance of actual client portfolios may be different. The effect of fees will reduce the returns achieved.
The impact of the move in sterling was felt in the performance of the underlying funds in October with UK smaller companies’ funds outperforming the FTSE 100 tracker fund. The top performing fund was TB Amati UK Smaller Companies fund held in the Adventurous model which rose 2.61% over the month. The next best performing funds were Baillie Gifford Pacific (+0.85%), L&G Property (+0.37%) and Blackrock European Dynamic (+0.15%). These three actively managed funds continue to add value relative to their respective indices. Merian North American Equity (-3.12%) underperformed the MSCI USA index (-2.73%) but is showing signs of stabilisation after a difficult period against a backdrop of unfavourable market dynamics for the style of investing adopted by the fund managers. Over five years the fund remains in the top quartile.
Within the fixed income allocation Axa Sterling Credit Short Duration Bond proved its defensive credentials rising 0.12%. This fund exhibits very low volatility and provides a stable core to all but the most adventurous of the models.
Global economic growth is clearly slowing and yet equity markets have made progress this year, propped up in large part by central banks pursuing accommodative policies. A key question for next year with interest rates at zero or lower in a number of countries will be the extent to which the authorities have any firepower left to stimulate their economies. In the UK the picture is clouded by next month’s General Election and what the result means in terms of Brexit policy. The rally in sterling this month was notable in so far as it wiped out gains made in overseas markets and whilst UK equities have underperformed it is worth remembering the role that currency can play. Certainly, for sterling-based investors it makes sense to maintain some exposure to sterling denominated assets.
In terms of style we reported in September’s review that a value style of investing had outperformed growth. One interpretation for the swing to value was a realisation that fears of a recession were overblown during the summer and that some sectors had become too cheap. With interest rates so low, the positive tailwind that falling interest rates has provided growth companies is no longer present and some investors are making the case for a resurgence in value-oriented investing. In the UK the dominant effect seems to have been size related in so far as smaller companies outperformed larger ones but more value-oriented funds continued to fare well in October.
The counter argument is that if recessionary fears resurface then it is likely investors will prefer to hold more defensive companies and sectors. JP Morgan in their latest market commentary write “Amid a slowdown in the major economies and ongoing geopolitical uncertainty, we continue to advocate building more defensive properties into portfolios to cushion returns should the economic environment continue to deteriorate. Within equities, investors may wish to focus on large-cap, high quality companies (those with strong balance sheets and healthy cash flows), which have historically been more resilient in downturns.”
The upshot is that investing globally and having exposure to both growth and value investment styles is crucial for portfolio diversification.
Investors should continue to maintain diversified portfolios with a blend of defensive and more risky investments. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
24th November 2019