Global Market Overview
Returns from global equities were strong again in December, rounding off a year in which all assets classes performed well, not only beating inflation but often generating double digit returns. The MSCI World index ended the year up 22.74%. In December the index rose 0.57% but this return was pared back by sterling’s strength versus the dollar. In local currency terms the index rose 2.28%. The principle reason behind the constructive attitude to risk assets was a phase one trade agreement between the US and China which meant that the scheduled increase in US tariffs on Chinese goods did not go ahead on 15 December as planned.
With the UK General Election producing a resounding victory for the Conservatives, removing the threat of a far left Corbyn led government and providing some clarity on Brexit, the FTSE 250 extended its outperformance of the FTSE 100 and was the best performing global equity index.
Both government and corporate bond yields rose (prices fell) in December as risk appetite increased and investors responded to more positive economic data. Up until the end of September government bonds had fared well alongside equities. Strong returns for both traditional risk-off and risk-on assets, simultaneously, is unusual but more normal patterns of behaviour were re-established in the fourth quarter.
*In the Euro Area, the main refinancing rate is 0 and the deposit rate is -0.5 percent
• US unemployment declined to 3.5%, its lowest level since 1969 and the joblessness rates elsewhere are holding steady.
• Global economic growth remains broadly positive and inflation has ticked up everywhere (with the exception of the UK) but in Europe remains below the ECB’s target of close to 2%.
• The UK economy avoided a technical recession (two consecutive quarters of negative growth) in the third quarter after contracting in the previous quarter.
• In the UK economically sensitive areas of the market outperformed as Brexit uncertainty diminished and in line with a return of risk appetite globally. However, the oil and gas sector underperformed despite the recovery in crude oil prices.
• Asia ex Japan equities delivered a strong return in Q4 after a period of significant underperformance, having borne the brunt of geopolitical risks associated with the US China trade dispute.
Performance of RPW Models over one month to 31st December 2019
All models rose in value over the course of December. The RPW Adventurous model achieved a return of 1.41%. This was followed by the RPW Moderately Adventurous model which advanced 0.84%. The RPW Balanced model rose 0.65%, the Moderately Cautious model by 0.32% and the Cautious model by 0.03%.
Performance of RPW Models over three months to 31st December 2019
Over the past three months, all models have increased in value. The RPW Adventurous model rose by 3.85%. This was followed by the RPW Moderately Adventurous model which advanced 2.25%. The RPW Balanced model rose 1.654%, the Moderately Cautious model by 0.64% and the Cautious model by 0.04%.
Performance of RPW Models over one year to 31st December 2019
Over one year, all models have generated a positive return. The best performer was the RPW Adventurous model which rose 22.81%. The RPW Moderately Adventurous model generated a return of 16.95%, the Balanced model rose 13.56%, the Moderately Cautious model was up 9.61% and the Cautious model rose 6.41%.
(Source: Financial Express Analytics, Total return, gross of fees, as at 31st December 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 UK General Election result was reflected in the performance of the funds held in the RPW model portfolios. With domestic shares, many of which are small caps, outperforming, the best performing fund in December was once again TB Amati UK Smaller Companies which rose 7.48% over the month. Man GLG Undervalued Assets generated a return of 5.09%, comfortably outpacing the FTSE 100 index (+2.78%) though not the FTSE 250 (+5.86%). Liontrust Special Situations lagged with a return of 2.73%.
Outside of the UK, the best performing fund was Baillie Gifford Pacific (+4.45%) which outperformed the MSCI AC Asia ex Japan index (+4.14%). At the other end of the scale Blackrock European Dynamic which has shown strong performance throughout the year came under some pressure, rising just 0.33% and ending up in the fourth quartile for the month. This fund is very actively managed and from time to time its performance does deviate quite significantly from that of the benchmark or peer group. Periods of underperformance are relatively infrequent and over the longer term the track record remains outstanding with the fund having achieved a return of 41.85% over the three years to 31st December, outperforming the FTSE World Europe ex index return of 28.18% over the same time period.
The returns from bond funds were mostly negative. Only Axa Sterling Credit Short Duration Bond fund posted a positive return of 0.29%. This reflects its very defensive stance and cash like properties. As government bond yields rose, the Allianz Gilt fund fell 1.79%. Corporate bonds followed suit but the exposure to credit risk helped to reduce their overall losses. The iShares Corporate Bond index fund fell 0.33% and L&G Sterling Corporate Bond index declined by 0.55%.
Although the US/China trade agreement is in only in its first phase, it seems unlikely that there will be a significant change in policy ahead of the US election. Trump may be a maverick in many respects but he is aware that a strong economy will enhance his position as the incumbent president. This bodes well for markets in the short-term but for a number of years commentators and strategists have been pointing to the fact that the global economy is in a late cycle phase and with the inversion of the US yield curve in the middle of last year it could be argued that the risk of a recession is rising. This does not necessarily mean that a recession is around the corner, however. As we have mentioned in these reports this recovery, whilst one of the longest on record, has also been one of the most modest and it seems plausible that it can therefore continue for longer. Certainly, this was the contention of Alister Hibbert, manager of Blackrock European Dynamic, one of the best performing funds held within the RPW models. At Blackrock’s 2020 Outlook conference on Tuesday 14th January he outlined his conviction that he does not see any significant economic imbalances either in the corporate or household sector which would presage a recession.
Hibbert also made an interesting observation about growth versus value, one of the hottest debates of recent times. Growth indices have significantly outperformed value indices leading some to posit the view that value investing is “dead” and yet others to argue that a reversion to the mean is long overdue. Alister’s view is that looking at the issue at an index level is wrong because there are such huge sector overweights embedded in the indices which distort the true picture. So, one of the reasons why value indices have underperformed is because energy stocks make up a significant proportion of these indices and these have suffered as a result in the medium-term decline in the oil price and not because using valuation-based metrics as a way of identifying companies to invest in no longer works. This highlights the oversimplification of the growth versus value debate and reiterates the potential for active managers to outperform broad based indices. We will continue to back active managers where we feel that paying the higher fees are justified and combine these funds with cheaper index trackers to fulfill the asset allocation that is deemed appropriate to meet clients’ objective and risk profile.
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.
20th January 2020