Global Market Overview
After the trauma of October, there was some respite in November although markets remain skittish and only really stabilised towards the end of the month when a meeting between President Xi and President Trump at the G20 indicated a potentially more positive outcome to trade talks between the US and China. There was also a boost provided by the Chairman of the Federal Reserve suggesting in a speech in New York that US interest rates are “just below” the neutral level and might not therefore need to rise much further. The MSCI World index rose 1.28%, with the 2.11% return of the S&P 500 offsetting declines in European and UK equities where worries over economic growth and political risk held sway. The weaker oil price also impacted the performance of the integrated oil and gas majors which make up a significant component of the FTSE 100 index although the more domestically focused FTSE 250 index underperformed on Brexit driven concerns. The performance of the global index was also helped by Emerging Markets which thus far have borne the brunt of negative investor sentiment, but which rallied 4.27% over the month, and Japan which rose 0.83%, following a rebound in economic data after the previous month’s natural disaster-induced weakness. Broadly speaking, value again outperformed growth shares over the month.
The US economy continued to grow, although there are some signs of softness, particularly in the homebuilding and auto sectors, where higher interest rates are starting to have an impact on demand. The labour market remains strong with October’s US payroll data better than expected. The unemployment rate remains at 3.7% and average hourly earnings grew to 3.1% year-on-year. Headline inflation increased to 2.5% year on year but the rapid fall in the oil price suggests that this will ease in the coming months. Core inflation, in contrast, declined to 2.1% year on year and although the market is still pricing in an 80% probability of a rate increase in December, the expectations for further hikes next year have eased.
Although the source of much commentary in the lead up, the US mid-term elections were fairly uneventful with the Democrats taking the House of Representatives whilst the Republicans held the Senate, as was widely anticipated. The Democrats are unlikely to sanction further tax cuts so this could mean less fiscal support for the economy in the future. This may have been another contributing factor in the fall in US bond yields.
A number of higher profile technology firms, including Apple, warned on profits but overall the third quarter earnings season was positive with earnings per share growth 25%+ year on year.
In the UK, third quarter GDP growth came in at 0.6% quarter on quarter, up from 0.4% in Q2 and the fastest pace since Q4 2016. Unemployment rose modestly from 4.0% to 4.1% but this is offset by continued wage growth, which accelerated over the quarter at the fastest pace for a decade. Headline CPI stabilised at 2.4% year on year whilst core inflation held at 1.9% year on year. However, all data remains highly dependent on whether or not parliament approves Teresa May’s deal on the EU withdrawal agreement.
Europe remains relatively weak, with economic data continuing to indicate slower growth. The Purchasing Managers’ Index (PMI) was 52.4, a 47-month low (but still above 50). Estimates for the third quarter annual GDP growth rate remained at a disappointing 1.7%. The German economy contracted by 0.2% compared to the previous quarter. This can be attributed to a slowdown in the auto sector where manufacturers have struggled to prove that vehicles meet the new emissions standards, but it could be indicative of a more widespread reduction in consumer demand. Inflation remains low and although the ECB is still expected to end its quantitative easing programme by year end, the anticipated interest rate rises in the second half of next year seem less likely.
Japan’s economic growth remains muted but positive trends at the corporate level continue (notwithstanding the removal of chairman Carols Ghosn at Nissan following his arrest for financial misconduct) with the announcement of record levels of share buybacks following the interim results season, boosting the trend towards better shareholder returns. Interestingly, value stocks bucked the global trend, underperforming their growth counterparts and reversing last month’s gains.
The fortunes of Asian and Emerging Market countries continued to diverge so it is difficult to make generalisations. For example, ratings agency Fitch recently downgraded the outlook for Mexico due to political uncertainty created by the current administration, whereas in Brazil the appointment of President Bolsonaro has been seen as a positive. Investor sentiment continues to be dominated by trade tensions between the US and China and US interest rate policy, with last month’s increase in risk appetite driven by the more dovish Fed. Another reason to be positive is Chinese fiscal stimulus which should be supportive of the economy and a boost to the Asian region.
US government bond yields fell from 3.14% to 2.99% over the month. Elsewhere government bond returns were also positive with the exception of the UK where the value of the FTSE Actuaries UK Conventional Gilts All Stocks index declined by 1.2%. Corporate bonds underperformed government bonds, reflecting concerns about the high level of corporate leverage against a backdrop of potentially slowing growth.
The oil price fell 22.30% over the month as a result of an increase in supply from Saudi Arabia and the US. It ended the month 2.32% lower than November 2017, a number which masks considerable volatility in the price over the course of the year.
Performance of RPW Models over one month to 30th November 2018
Up until the 25th of the month the RPW models were performing in line with expectations but a rally in risker assets towards the end of the month meant that the RPW Adventurous Model was the best performing model, achieving a positive return of 0.57%.
Performance of RPW Models Year to Date, to 30th November 2018
All RPW Models are now in negative territory for the year.
Performance of RPW Models over 1 Year to 30th November 2018
Over one year to 30th November 2018, the Cautious model has declined by 0.08% whilst the the Adventurous Model has returned 0.13% (Source: Financial Express Analytics, Total return, Gross of fees, as at 30th November 2018). It is rather unsettling to see that the Adventurous Model has outperformed all the other models which are in negative territory. This is a function of the elevated levels of volatility, prevalent this year, when a rally in equities late in the month can distort the overall picture. Over a longer time period the return profile should stabilise.
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.
There was little consistency in the pattern of fund performance in November. In some regions growth oriented funds did well, elsewhere it was value which did better.
The best performing fund over the month was Legg Mason IF Japan Equity, recovering some of the ground it lost in October, indicating perhaps that investors regarded the double-digit declines in some of its underling holdings as having been excessive. In contrast, Jupiter North American Income continued its positive trend, generating a return of 3.86% and again outperforming the S&P 500 index. The UK funds detracted the most from returns with Invesco UK Strategic Income falling by 2.64% and Man GLG Undervalued Assets declining 3.23%. The Merian UK Smaller Companies fund, held in the Adventurous Model only, fell 6.33%.
Investors are, without doubt, nervous and markets are struggling to find a clear direction. We are torn between relatively strong fundamentals today and a number of clouds on the horizon which threaten corporate earnings in the future. Concerns around global trade, a maturing economic cycle, the risk of Central Bank policy error and of course, Brexit are not going to be resolved overnight. A more dovish announcement from the US Federal Reserve provided a fillip to markets at the end of the month but can also be interpreted as a sign that growth has likely peaked. Elsewhere Central Bankers have struggled to move away from the zero-interest rate policy adopted in the aftermath of the Great Financial Crisis which provides them with little ammunition for the next slowdown.
As always, after periods of heightened volatility and in anticipation of further bouts of market stress, it is tempting to reduce exposure to riskier assets. However, we know that trying to time the market is a fool’s errand. Investors should consider very carefully what their tolerance to risk is and revisit their time horizon to determine whether or not they are comfortable with the risk and return profile of their portfolios. If they are not, then they should take appropriate action. Otherwise, investors with a longer-term time horizon (5 years or more) should allow the asset allocation and regular rebalancing that we advocate to carry out the job it is designed to do. Whilst disheartening, periodic falls in the value of portfolios, is a part and parcel of investing.
We are wary of making any Brexit predictions and it may be wishful thinking, in terms of getting some clarity around the way forward, but it seems that the most likely scenario is that a version of Teresa May’s deal will eventually be approved by Parliament, there being even less support for the “no deal” outcome which some of the hard line Brexiteers advocate. If this happens then sterling is forecast to rally and unloved sectors of the UK stock market should see a revival. For UK based investors, therefore, it remains sensible to retain some exposure to the UK. We are neither overweight nor underweight relative to our long term strategic asset allocation, a position which has hurt us in recent years, but we do not see any merit in making significant changes at this point.
Volatility has returned and the prospects for a so-called “Santa rally” seem low but those who have been forecasting uncontrolled inflation or an imminent recession have been consistently wrong-footed in recent years. 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.
13th December 2018