Global Market Overview

The start to 2019 has been much more positive for investors than the end of 2018. Global equities made good gains in January, recovering some of the ground lost in the fourth quarter of last year. The key reason for this seems to have been a reversal in the US Federal Reserve’s policy towards interest rates, with an indication that any further increases would depend on economic momentum rather than a pre-determined flight path. Risk appetite was further bolstered by President Trump’s statement that he would meet with China’s President Xi Jinping in February in order to work towards a resolution to the trade dispute.

The MSCI World index advanced 4.35% in sterling terms. The strength in sterling meant that in local currency terms the return was 7.24%, which is the best ever January on record. The best performing market for sterling based investors was the FTSE 250 which rose 7.61%, benefitting from the rally in the pound and increasing hopes that the UK would avoid crashing out of the EU without a deal. By contrast the FTSE 100 achieved a return of 3.63% with sterling strength proving to be a headwind for the dollar earners within the index. A number of the larger index constituents are also considered to be more defensive which proved helpful in December, but they tend to lag when risk appetite is strong. Emerging markets rose 5.31% faring well on the back of dollar weakness whilst the US (S&P 500) returned 4.6%. Europe and Japan also generated positive returns, with the FTSE World Europe ex UK index returning 3.14% and the TSE TOPIX returning 2.65% in sterling terms.

US economic data remains broadly steady. There are some signs of pressure coming from the US-China trade tensions with the December ISM manufacturing survey experiencing the largest monthly decline since 2008 although it remains above fifty at 54.1. The labour market continues to be strong with more non-farm payroll jobs added in January than were expected. However average earnings growth cooled very slightly from 3.3% to 3.2% and the latest headline inflation reading for December fell too 1.9% year on year. As a result the bond markets have priced in no further rate rises from the Fed for the rest of the year. Around 40% of companies have reported their fourth quarter earnings with earnings-per-share growth coming in at a decent 15% but there were some cautionary signs with the likes of Caterpillar issuing more conservative guidance and Apple warning of more difficult trading conditions.

Economic data in the Eurozone continues to be relatively weak with exports hurt by the fall in demand from China. Q4 GDP growth was 0.2% quarter-on quarter, the same as in Q3. Meanwhile Italy has fallen into a recession, the technical definition of which is two consecutive quarters of negative growth. One positive is that the unemployment rate remained stable in December at 7.9%. This is the lowest it has been since October 2008 and should continue to support domestic consumption. The European Central Bank (ECB) stated that the risks to the eurozone growth outlook have moved to the downside but did not change its forward guidance on interest rates which is that they will remain unchanged at least until the summer of 2019. Interestingly the best performing sectors in Europe over the month were the more economically sensitive ones such as autos and semiconductors, whereas communication services, which had held up well in December, underperformed.

In the UK, although the deal that Theresa May has negotiated with the EU failed to pass a vote in parliament by a signficant margin, the ensuing votes demonstrated that there is a parliamentary majority against a no-deal scenario and secondly that the main sticking point continues to be the Irish border backstop. This seems to have led to the belief that a no-deal is less likely with the result that sterling strengthened and the UK stockmarket benefitted from renewed investor confidence. Amidst the political turmoil, the labour market has remained healthy with the unemployment rate falling to 4.0% and wage growth increasing 3.4% year-on-year and retail sales over the Christmas period were reasonably reassuring.

Japan’s economy continues to be rather lacklustre with the Bank of Japan revising down its forecasts for growth and inflation over the next year. However, as in Europe, it was the more cyclical and economically sensitive sectors which performed the best over the month whilst more defensive sectors such as railways and foods lagged.

Asia and Emerging Markets macroeconomics continue to be dominated by the situation in China where concerns of a slowdown prevail. Annualised GDP for the fourth quarter was 6.4%, the first time that the rate has been below 6.5% and Chinese exports declined 4.4% year-on-year in December, the biggest monthly fall in two years. The Chinese authorities have continued to act to stimulate the economy, with the People’s Bank of China cutting the Reserve Requirement ratio by 100 basis points throughout January and with further easing expected. This combined with growing optimism regarding US China trade relations bolstered market sentiment. All markets closed higher with the exception of India where the rupee weakened on growing fiscal concerns.

Global government bonds did well in January with yields falling (prices rising) although the strength in sterling translated into negative returns for UK investors. Often bonds perform best when equities are under pressure as investors switch into less risky assets and vice versa. However, the move to a more dovish policy by the US Fed was positive for both bonds and equities as investors simultaneously discounted the decreased risk of higher interest rates on bond prices and concerns that higher rates would choke off economic activity. Slowing growth, especially in Europe and China, also heightened deflationary concerns which is positive for bonds. The FTSE Actuaries UK Conventional Gilt All Stocks index rose 1.06%. Corporate bonds (the Bank of America Merrill Lynch £ Non-Gilts index rose 1.7%) outperformed governments as spreads tightened, meaning that investors required a lower yield above the risk-free rate of government bonds to compensate for the additional credit risk. This is a reflection of the increased risk appetite evident across asset classes throughout the month.

The oil price rebounded 12.55% in January although it remains in negative territory over one year.

Performance of RPW Models over one month to 31st January 2019

All RPW models advanced over the month. The RPW Adventurous model returned 4.66%, recovering much, but not quite all, of the ground lost in December. The Cautious model rose 1.32%.

Performance of RPW Models over one year to 31st January 2019

Given January’s positive numbers, the one-year performance for the models has improved with the Cautious model now flat for the year. The Adventurous model declined 4.42% over the year.

Performance of RPW Models over three years to 31st January 2019

In the three years to 31st January 2019, the Cautious model has delivered a return of 11.82% (not including fees). This compares to a return of the ARC Sterling Cautious Index of 8.76%. Over the same period the RPW Adventurous Model has returned 42.78% (not including fees). This compares to the ARC Sterling Equity Risk Index return of 27.31%.

(Source: Financial Express Analytics, Total return, gross of fees, as at 31st January 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.

Funds Update

The top performing funds was Man GLG Undervalued Assets (+7.43%) which invests in UK companies whose shares are trading below their tangible asset value and generating cash or shares whose earnings streams are undervalued that are enjoying positive earnings momentum. The fund also benefitted from its exposure to mid and small cap companies.
Merian North Amercian Equity achieved a return of 6.41% beating both the IA North America sector return of 5.54% and the S&P 500. This was a welcome return to form after a period of weaker returns in 2018.

Unsurprisingly for a month where taking risk was rewarded the Axa Sterling Credit Short Duration Bond fund was the worst performing fund, returning a more modest 0.37%. This fund is by no means completely risk-free as it is exposed to corporate credit but it exhibits very low volatilty and can be considered as an alternative to cash for investors who wish to take a little more risk in order to generate a higher return. Over the three years to 31st January 2019 the fund has achieved a return of 4.63% which is relatively pleasing against a backdrop of record low interest rates.

We recently met with the new manager of Jupiter North American Income. Stuart Cox took over management of the fund in December from Sebastian Radcliffe, following a restructure of the team. He has successfully co-managed the Jupiter Global Managed fund for the past three years with the fund’s US stock picks outperforming the market. His first move has been to reduce the cash weighting in the North American Income fund from 9% to 2%, investing in a number of his highest conviction ideas, such as global aerospace and defence company Lockheed Martin and Enterprise Products Partners, the Houston based, energy pipeline, storage and processing business. He has also reduced the tail of smaller holdings with the result that the fund now has thirty-seven holdings rather than forty-six with the focus being on stock specific risk rather than big sector bets. Compared to his predecessor another difference is the focus on higher quality companies and the portfolio holdings now on average have a higher return on equity and higher return on invested capital than before and he has reduced the overweight to financials and underweight to technology. We had a good meeting and Stuart was keen to demonstrate how his approach to stock picking should generate superior returns. However, he is relatively inexperienced as a lead fund manager and we will be monitoring ongoing developments carefully.

The performance of Invesco UK Strategic Income remains disappointing. We reduced exposure to the fund last year but with the benefit of hindsight and a short term outlook we would have been better off exiting the position entirely. However taking into account a longer term horizon we are also wary of selling at the point of maximum pain (if indeed that has yet been reached) as this is often the worst time to do so. We have a conference call with the manager Mark Barnett, early next month and will report back in our next newsletter.

Outlook

The pace of global economic growth has clearly started to decelerate but the bounce back in global equity markets since Christmas suggest that the fears of a recession in the fourth quarter last year were overblown. Furthermore the major Central Banks, having looked as though they were on course to tighten signficantly what had been very loose monetary policy, have all started producing much more doveish rhetoric. US Federal Reserve Chairman, Jerome Powell, in particular, has, in the words of John Authers, one of our favourite market commentators, initiated “about as drastic a reversal as a central bank could possibly pull off in six weeks.” Once again the oft-quoted maxim, “Don’t fight the Fed” seems to be the order of the day.

However even with fears of a global recession, triggered by over aggressive policy making, diminishing there are still plenty of things for investors to worry about and after such a strong start to the year it seems very unlikely that investors will not be in for a bumpy ride. The volatility exhibited by numerous asset
classes in 2018 is likely to continue as market participants react to earnings data, macroeconomic data points, central bank statements, Trump’s tweet etc. Here in the UK we have our own particular mountain to climb with the Brexit deadline looking ever closer. If a no-deal Brexit is avoided the strength of the labour market may give the Bank of England enough of a reason to increase interest rates modestly which may benefit sterling and investors may well pile into a market that has been largely shunned but, as we wrote last month, we do not believe it is prudent to make any changes to portfolios on the back of flimsy predictions.

Summary

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.

14th February 2019

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