Global Market Overview
Hopes of a trade deal between the US and China evaporated in May when the US raised tariffs on $200 billion of Chinese imports from 10% to 25%. China retaliated by increasing the tariffs on $60 billion of imports from the US from a range of 5-10% to 5-25%. As a result, global markets, which rose for the first four months of the year, suffered a setback.
The MSCI World index fell 2.54%. The strengthening yen meant that Japanese equities were the best performers in sterling terms with the TSE TOPIX declining by only 1.43%. The FTSE World Europe index also benefitted from weaker sterling and fell by 1.68%. The FTSE All Share fell 3.00% and the S&P 500 ended the month 3.21% lower. Emerging Markets (-4.07%) and Asia ex Japan (-5.39%) were the laggards, bearing the brunt of negative sentiment surrounding the trade wars.
Economic data released during the month in the US was mixed. The US manufacturing purchasing managers’ index fell two points to 50.6, whilst the new orders component declined to below 50, an indicator of a contraction in this sector of the economy and the first time this has happened since 2009. This is a sign that the ongoing trade uncertainty is having an effect. Meanwhile the labour market remains in good health with the overall unemployment rate falling to 3.6% from 3.8% and consumer confidence remains strong with a reading of 134.1 in May compares to 129.2, a month earlier. Against this backdrop the Federal Reserve maintained its dovish stance, and although there was nothing to suggest in the minutes of the 1st May Federal Open Market committee meeting that they felt a rate cut was necessary, recent comments from the Vice Chair Richard Clarida suggest that the Fed would be willing to cut rates if the data pointed to a material deterioration in the economic outlook.
In addition to the tariffs imposed on China, the US also said it would introduce a new tariff of 5% on all Mexican imports to try to force the Mexican government to take action against migrants entering the US and Chinese tech giant Huawei was backlisted on security fears. These actions hurt the technology, energy and industrial sectors whilst utilities, healthcare and consumer staples were more resilient.
The Eurozone has proved to be particularly sensitive to concerns about global trade and this month was no different. The materials, financials, autos and semiconductor sectors declined the most whilst utilities and staples fare better, as in the US. Economic data, meanwhile, showed a similar disparity to the US. The flash manufacturing PMI fell to 47.7, indicating contraction. However, whilst new export orders remained below 50 the number did improve and consumer confidence is also at its highest level this year. Employment growth remains robust, the first estimates for Q1 showing a pick up to 1.4% quarter on quarter, annualised.
The European Parliament elections took place in May. Centrist parties lost ground, with Green parties benefitting, but anti-EU populist parties made limited advances and did not do as well as some had feared.
Little has changed in the UK where Brexit continues to be the focus of attention. Following her failure to secure parliamentary support for her withdrawal bill, Prime Minister Theresa May announced that she would step down on the 7th June after President Trump’s visit. This was interpreted by the market as making it more likely that the UK, led by a hard line Conservative Brexiteer, would leave the EU without a deal. Currency traders reacted accordingly, with sterling falling against the dollar, Euro and yen and in a familiar pattern, the more international FTSE 100 outperformed the FTSE 250. Despite the political uncertainties the preliminary Q1 GDP release from the Office of National Statistics revealed the economy expanded by 0.5, in line with expectations and growth expectations were revised upwards by the Bank of England in its quarterly report. However, the manufacturing purchasing managers’ index declined from 55.1 to 53.1 supporting fears that much of the activity head of the initial 31 March deadline was driven by stock-piling. As in the US and Europe, economically sensitive sectors were the laggards.
An oft observed correlation between the strength of the currency and the stock market appeared evident in Japan in May with strength in the yen being offset by falling equity prices. The inter-connectedness of the global economy is also evident in Japan where the US campaign against Huawei is having a negative impact on Japanese electronic component suppliers and the announcement of tariffs on Mexico will impact those Japanese auto companies who have invested in production facilities there. Economic data was mixed. Contrary to expectations, real GDP grew at an annualised rate of 2.1% during the quarter although the underlying data does point to weaknesses in the domestic economy and as a result, it is widely expected that the consumption tax increase planned for October will be postponed.
The US trade tariffs have been estimated to reduce China’s GDP growth by 0.8% this year and next. The Chinese authorities have acted to address the slowdown, cutting the reserve requirements ratio again and announcing tax cuts on personal and corporate incomes. However, the most recent data has been weaker than expected with industrial production data falling to 5.4% year on year in April, from 8.5% the preceding month. Retail sales rose 7.2% year-on-year, the slowest pace for sixteen years. Chinese stocks performed poorly as did South Korea and Taiwan where technology heavyweights suffered big falls.
There was more positive news in India where the general election was won by Narendra Modi’s Bhartiya Janata Party (BJP) and Indian stocks reacted accordingly with industrial and financials recording the biggest gains. This clarity on the political outlook should prove positive for markets if the potential for long-term growth in India can be unlocked.
Outside of Asia, Russia posted a positive return on the back of a strong rally in the share price of Gazprom while Colombia under-performed as a result of a lower oil price and weakness in the price of copper proved to be a headwind in Chile. Overall the MSCI Emerging Markets Index declined and underperformed the MSCI World but it is worth remembering how diverse its make up is.
The decline in risk appetite over the month was reflected in the performance of bonds with governments outperforming corporates, a reversal of what happened in April. The US 10-year Treasury yield was 38 basis point lower, finishing the month at close to 2.1%, a level not seen since late 2017. The yield curve remains inverted with shorter-dated yields higher than those with a longer maturity. Yields were also lower in Germany, France, Spain and the UK where the FTSE Actuaries UK Conventional Gilt All Stocks index went up 2.71%.
The oil price declined 7.86%.
Performance of RPW Models over one month to 31st May 2019
All RPW models declined over the month. The Cautious model declined by 0.13%, the RPW Moderately Cautious model by 0.72%, the RPW Balanced model by 1.94%, the RPW Moderately Adventurous model by 2.37% and the RPW Adventurous model by 2.84%.
Performance of RPW Models over three months to 31st May 2019
Over the past three months, the RPW Adventurous model has advanced 3.63%, the RPW Moderately Adventurous model by 2.49%, the RPW Moderately Cautious model 2.05% and the RPW Balanced Model by 2.05%. Meanwhile the RPW Cautious Model rose 1.81%.
Performance of RPW Models over one year to 31st May 2019
Over one year, the RPW Cautious and RPW Moderately Cautious models generated positive returns of 1.45% and 1.15% respectively. The RPW Balanced model declined 0.22%. the RPW Moderately Adventurous model fell 0.36% and RPW Adventurous model fell 0.54%.
(Source: Financial Express Analytics, Total return, gross of fees, as at 30th May 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.
It was a tough month for funds with most of the equity funds posting declines. Man GLG Undervalued Assets (-5.91%) and Baillie Gifford Pacific (-5.42%) were the biggest fallers. At the opposite end of the spectrum, Allianz Gilt Yield rose 3.18% as investors flocked to more defensive assets. Allianz Gilt Yield was the only fund to post a negative return in April, thus demonstrating the value of diversifying portfolios with different asset classes that exhibit low correlation. Axa Sterling Credit Short Duration Bond (0.19%) and L&G UK Property (0.04%) also held their value.
Woodford Investment Management
Star manager, Neil Woodford has dominated the headlines in the last month following the decision to gate his flagship fund, Woodford Equity Income, after a slew of redemption requests, which if met would have caused the fund’s holdings in unlisted investments to breach regulatory limits. We are pleased to confirm that we have never recommended any investment managed by Woodford Investment Management. Whilst Neil Woodford built a very strong track record during his 20+ year career at Invesco Perpetual, we had a number of concerns about the new company and his role within it and we felt that there were better ways to gain exposure to UK equities.
One of the perils of writing a monthly commentary is that it is all too easy to get caught up in short-term gyrations rather than take a step back and think about the bigger picture. So, this month is almost the exact opposite of what happened in April with fears of a recession resurfacing and the US/China trade war appearing to have escalated with financial market reacting accordingly.
Where they go now is anyone’s guess but it is prudent to ensure that portfolios are diversified within their constituent parts. Thus, our UK weighting is made up of a variety of different funds: a low cost FTSE 100 tracker, which in providing exposure to the largest one hundred companies whose combined revenues are mainly derived from overseas, offers some defence against sterling weakness in the ongoing Brexit turmoil, actively managed multi-cap funds pursuing different investment styles and for clients with an adventurous attitude to risk, some exposure to a dedicated small cap fund which, whilst more volatile, does provide the potential for greater returns. Within fixed income we have blended exposure to sterling investment grade credit which is the benchmark for the long-term strategic asset allocation provided by Moody’s Analytics with a short-duration, higher quality credit fund which is closer to cash on the risk spectrum and a fund investing in gilts where there is limited credit risk. Whilst there is more exposure to rising interest rates and inflation in a fund of this nature it tends to benefit from a flight to quality mentality in a risk-off environment and is able to help provide some protection when equity markets are falling.
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 June 2019