Global Market Overview
Following a negative month in August when global trade concerns dominated investors’ thoughts, September saw a slightly more positive stance take hold with the MSCI World index advancing 0.93% in sterling terms. However there was a marked change in regional leadership in September with both Japan and the UK outperforming the world index. The FTSE All Share index generated a return of 2.95%. Medium sized companies outperformed their larger counterparts with the FTSE 250 posting a return of 3.68% compared to the FTSE 100 return of 2.97%. The outperformance of the UK market was exacerbated by the strength in sterling which rallied against the US Dollar, Euro and Yen. Meanwhile the TSE Topic index advanced 2.92%. The S&P 500 only managed a return of 0.63% in sterling terms and was the worst major market performer, lagging behind the MSCI Emerging Markets index return of 0.71% and the FTSE World Europe ex UK index return of 1.01%. There was also a marked shift in market leadership with a “value” investment style outperforming “growth”. This led to an outperformance of sectors such as financials and materials which have previously been out of favour.
Over the quarter Japan generated the best equity market performance with a 6.45% return. This was followed by the S&P 500 which returned 4.87%. The FTSE World Europe ex UK index managed a 1.59% return with the FTSE All-Share generating a return of 1.27%. MSCI Emerging Markets (-1.11%) and MSCI AC Asia ex Japan (-1.37%) both ended the quarter in negative territory.
A notable feature of the quarter was the outperformance of fixed income investments with both government and corporate bonds responding well to central bank action to cut interest rates. The FTSE Actuaries UK Conventional Gilts All Stocks index achieved a return of 6.55% over the quarter and the IBOXX UK Sterling Non-Gilts All Maturities index rose 3.68%. The ICE BofAML US Treasury index rose 5.87%.
Although the quarterly returns for bonds were strong, September’s performance was much more muted. Yields actually rose (ie. prices fell) in the US with the ICE BofAML US Treasury index declining by 2.07% in sterling terms although this fall was exacerbated by dollar weakness. In dollars the decline was 0.90%. The FTSE Actuaries UK Conventional Gilts All Stocks index rose 0.50%. Corporate bonds underperformed gilts with the ICE BofAML Sterling Corporate index rising 0.06%.
The oil price declined by 0.5% over the month. Over the quarter the price fell by 5.96%. During the month there were drone attacks on two major oil producing facilities in Saudi Arabia. Production resumed quite quickly and the market seemed to shrug off concerns but geopolitical risks in the region appear to be rising.
In the US, the Federal Reserve cut interest rates again in September, following on from it’s 25 basis point cut in July. The Committee was split, however, and with economic growth still positive it should be seen as more of a pre-emptive move given a fall in business investment due to the ongoing lack of a clear resolution in the US-China trade talks. Unemployment remained low at 3.5% a reduction from 3.7% and inflation is stable, remaining at 1.7%. Business confidence deteriorated over the month but the Purchasing Managers’ Indices (PMI) for both manufacturing and services improved very slightly and remain over the important threshold level of 50. Impeachment proceedings for President Trump have added to the general air of uncertainty.
Economic data continues to be weak in Europe. The manufacturing PMI fell from 47 to 45.7 as Germany hovers on the brink of a recession. The composite PMI including services is at 50.1, a reading below 50 indicating a contraction in overall economic activity. Consumer and business confidence also fell. The departing head of the European Central Bank, Mario Draghi, attempted to kickstart the flagging economy with stimulus measures including cutting the deposit rate and restarting quantitative easing. This was despite public opposition to these moves from other ECB council members who are not convinced that further monetary stimulus is likely to have the desired effect given the fact that interest rates are already so low. At his press conference on September 12th Draghi spoke of the need for fiscal stimulus “in view of the weakening economic outlook…governments with fiscal space should act in an effective and timely manner”. Whether or not Germany which has the headroom for such fiscal stimulus will be able to stomach it politically is another matter but it is certainly at the top of the agenda.
Political uncertainty continues to be a theme with the breakup of the governing coalition in Italy and the fourth general election in four years for Spain on 10th November after April’s election failed to produce a governing coalition.
In the UK, as the October 31st Brexit deadline approaches, there has been no let up in Brexit related news flow with the government and Parliament continuing to be at loggerheads. Meanwhile the impact is being felt on economic activity. The services PMI dropped to 49.5 in September from 50.6 in the previous month with firms reporting that the heightened uncertainty around Brexit had led to the postponement of orders by clients. In addition, new export business contract at the fastest pace since March while employment fell for the first time in five months and at the fastest rate since August 2010. In contrast, UK consumer confidence actually rose in September and there is scope for a major fiscally-driven expansion, not least because both the Conservative and Labour parties have committed to spending more, albeit with different priorities, and have the ability to do so given the improvement in the UK’s public finances over the last five years.
The economic and political situation in Japan appears to be relatively stable. The country is by no means immune to the global slowdown as demonstrated by the decline in the manufacturing PMI from 49.3 to 48.9 in September but bi-lateral trade negotiations between the US and Japan seem to have made some progress. In September in a bid to combat deflation the Bank of Japan undertook some measures to encourage a steepening of the yield curve. It also stepped back from its purchase of exchange-traded funds but survey data suggests that the pick up in corporate share buybacks will continue.
Whilst political unrest in Hong Kong continued to dominate the headlines, the effects of the trade tensions and global growth concerns weighed on the stockmarket performance of Asian and Emerging Markets. However from a macroeconomic point of view the data is mixed, reminding us that individual countries have very different drivers of economic performance. In China, the composite PMI rose slightly to 51.9, the highest reading in five months but this was offset by business confidence regarding the 12-month outlook for activity weakening to a three-month low. Other data for August released by China during the month showed that whilst the domestic economy remains resilient production there was a slowdown in the in the more export oriented sectors. Meanwhile whilst the central bank of Thailand kept rates on hold, the central banks of the Philippines and Indonesia continued with their loosening cycles and cut rates by 25bps. Mexico and Brazil also reduced their policy rates by 25bps to 7.75% and 5.5% respectively whilst Columbia’s strong domestic fundamentals and growth rates enabled the central bank to leave the rate stable at 4.25%. Vietnam released a wide set of macroeconomic figures, the majority of which were stronger than expected. Q3 real GDP growth accelerated to 7.3% year on year driven by a broad-based strengthening of industrial, construction and services economic activity. In India, a substantial reduction in the rate of corporate income tax, was announced in September, and continued rate cuts demonstrate the authorities’ desire to boost the economy.
Performance of RPW Models over one month to 30th September 2019
All models just managed to nudge into positive territory over the course of September. The RPW Moderately Adventurous model was the top performer with a 0.80% return. This was closely followed by the RPW Adventurous model (+0.78%) and the RPW Balanced model (+0.72%). The RPW Moderately Cautious Model generated a return of 0.46% whilst the RPW Cautious model ended the month up 0.18%.
Performance of RPW Models over three months to 30th September 2019
Over the past three months, all models generated a positive return although volatility in equity markets meant that the usual pecking order was disrupted. The RPW Moderately Cautious model rose 2.29%. This was followed by the 2.26% return generated by the RPW Moderately Adventurous model. The RPW Balanced model rose 2.23%. The relative laggards were and the RPW Adventurous model with a return of 2.18% and the RPW Cautious Model which returned 1.80%.
Performance of RPW Models over one year to 30th September 2019
Over one year, all models have generated a positive return although the effects of the equity markets sell-off in the final quarter of 2018 are evident in the data with the less risky models outperforming the more risky ones. The RPW Moderately Cautious model rose 4.63 and the RPW Cautious model by 4.11%. The RPW Moderately Adventurous model achieved a return of 3.40% over the year. The RPW Balanced model was up 3.29% and the RPW Adventurous model increased by 2.84%.
(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 change in market leadership was reflected in the performance of the funds in September. Man GLG Undervalued Assets rose 4.35% outperforming the sector average return of 2.71%. Mid and small capitalisation companies also did well with the result that the iShares 100 UK Equity index tracker (+2.56%) underperformed the broader FTSE All-Share index (+2.95%). Blackrock European Dynamic which has more of a growth rather than value oriented approach has a weaker month under performing the IA Europe excluding UK sector average and placing it in the fourth quartile. Over three years it remains first quartile having achieved a return of 40.11% versus the sector average return of 26.90%.
There has been much discussion about the valuation discrepancy between value and growth investments. An investment approach which favours growth has outperformed for a number of years and certain sectors have become increasingly expensive. On some metrics this valuation anomaly is as stretched or even greater than it was at the height of the TMT bubble when it peaked in March 2001. At that time there was talk of a new paradigm but eventually fundamentals reasserted themselves and the market rebalanced. The market dynamics are not the same almost twenty years on but many investment commentators do believe that the outperformance of growth versus value cannot continue indefinitely and are starting to look for catalysts for a change in market leadership.
There was no obvious catalyst in September but perhaps investors are beginning to take the view that central bankers have done all they can in terms of loosening monetary policy and that fiscal spending will have to take on the baton of economic stimulus. In this scenario inflation, which has hitherto remained surprisingly subdued may yet re-emerge and companies which have not had any pricing power and sectors such as financials may benefit. However fears of a recession are not unfounded and it may be this rally in value stocks peters out again as it did in the second half of 2016, following Trump’s election victory and following the sharp value rally in December 2018 when highly rated technology shares sold off. In a recessionary environment investors are typically prepared to pay more for safety and companies with strong balance sheets which are growing tend to fare better than cheaper, more highly leveraged, often cyclical businesses. It may be that there is more pain to come but it does seem unlikely that growth will continue to outperform value forever. Similarly, investors are unlikely to shun the UK market forever given how cheap some sectors and companies have become relative to their global peers. Indeed there has been a marked pick up in M&A activity as private equity investors seek to take advantage of negative sentiment, sterling weakness and low valuations. For investors in the UK listed markets there will have to be some sort of resolution to the Brexit debacle and with a no deal Brexit arguably already priced in there is plenty of potential upside.
The upshot of all of this is that it serves as a powerful reminder that investors should remain diversified across asset class, region, currency, market capitalisation and investment style.
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 October 2019