Global Market Overview
Tit for tat trade proclamations between the US and China in August and increasing concerns about growth caused a widespread sell-off in global equities as investors sought the relative safety of government bonds. The MSCI World index declined by 1.51%. Japan proved the most resilient of the major markets in sterling terms with the TSE TOPIX index falling 0.62% after the yen strengthened 2.84% versus the pound. The S&P 500 declined by 1.12% and the FTSE World Europe ex UK by 1.35%. The FTSE All-Share index fell 3.57% outperforming the FTSE 100 return of -4.36%. Developed outperformed emerging markets with the MSCI AC Asia ex Japan index falling 3.86% whilst the MSCI Emerging Markets index ended the month down 4.36%.
As mentioned in last month’s commentary the US Federal Reserve cut interest rates at the end of July. The accompanying statement disappointed investors as the suggestion was that the Fed did not envisage significant further cuts. The Jackson Hole meeting of central bankers and finance ministers from around the world in August which has, in the past, provided pivotal moments in markets offered little further insight into the direction of travel for US monetary policy. Economic data indicates that growth is slowing but the employment rate and wage growth remain strong. Despite this inflation appears to be under control falling to 1.7% from a previous rate of 1.8%. Towards the end of the month the US two-year yield fell slightly below the 10-year. This is known as a yield curve inversion and is often interpreted as an indicator of an impending recession. The University of Michigan Consumer Sentiment index weakened amidst extensive commentary in the press about the increased risk of a recession.
Growth remains under pressure in Europe with the quarterly GDP growth rate falling to 0.2% in June, down from 0.4% in the previous quarter. The composite Purchasing Managers’ Index rose to 51.9 from 51.5 but a strong services sector offset weakness in manufacturing which at 47 remains below the crucial level of 50. Although the August data did show an improvement from July, at a country level the former engine of the Eurozone’s economic growth, Germany appears to be on the brink of a recession as its economy contracted by 0.1% in the second quarter with the Bundesbank not anticipating a pick-up in orders for cars and industrial equipment in the third quarter. The European Central Bank is expected to unveil new stimulus measures in September.
In the UK, new Prime Minister, Boris Johnson, has struggled to unite MPs or the country. In addition, he lost his majority shortly after announcing his intention to prorogue Parliament for longer than usual prompting him to expel a number of Tory stalwarts who rebelled in protest. Brexit concerns appear to be weighing on the UK economy with GDP falling 0.2% in the second quarter, following 0.5% growth in the first quarter. The manufacturing PMI remains below 50 at 47.4 down from 48 in the previous month and the services PMI was 50.6, down from 51.4 in July. The unemployment rate remains low at 3.8% and wage growth at 4% is the strongest it has been in recent times. The Bank of England base rate remains steady at 0.75%.
Data for Japan’s second quarter GDP was released in August and was better than expected but investors seem to have been more focused on the strength of the yen and the negative impact that this can have on company exports. The labour market is very tight with an unemployment rate of just 2.2%. Despite this the inflation rate remains very subdued but positive at 0.3%. As elsewhere the manufacturing PMI (49.3) remains below the services PMI (53.3). Restructuring is often talked about in a Japanese context and there were some interesting corporate developments with Sony and a number of printing companies announcing changes to their long-term strategic shareholdings.
Newsflow in Asia has been dominated by China where the authorities have been acting to curtail the effects of the trade war on its economy, delivering both fiscal and monetary stimulus. In August the People’s Bank of China announced a lending rate reform to lower financing costs and allowed the renminbi to weaken versus the US dollar below the symbolic 7RMB per 1USD threshold.
Elsewhere, in a reminder that investing in emerging markets is risky, Argentina came under pressure with the peso weakening 26% vs the dollar in August and the main equity index dropping over 40% following election results which showed that the current government could lose power in October.
As risk appetite diminished over the month, bonds unsurprisingly did well with governments outperforming corporates. The ICE BofAML US Treasury index advanced 4.11%. The FTSE Actuaries UK Conventional Gilts All Stocks index rose 3.53%. This compared to a rise of 1.61% for the ICE BofAML Sterling Corporate index.
The oil price declined by 6.03%.
Performance of RPW Models over one month to 31st August 2019
In a month during which equity markets lost ground the RPW models performed in line with expectations. The RPW Cautious (+0.49%) and Moderately Cautious (+0.24%) models eked out positive returns. The higher risk models lost some ground with the RPW Balanced model declining by 0.90%, the RPW Moderately Adventurous model by 1.63% and the RPW Adventurous model by 2.66%.
Performance of RPW Models over three months to 31st August 2019
Over the past three months, the RPW Cautious Model rose 2.63%, the RPW Moderately Cautious model 3.50%, the RPW Balanced Model 4.23%, the RPW Moderately Adventurous model 5.11% and the Adventurous model 5.91%.
Performance of RPW Models over one year to 31st August 2019
Over one year, all models have generated a positive return although after last month’s sell-off the more cautious models have outperformed. The RPW Moderately Cautious model rose 3.82%, the RPW Cautious model by 3.60% and the RPW Balanced model by 2.19%. The RPW Moderately Adventurous model rose 2.16% over one year and the RPW Adventurous model increased by 1.5%.
(Source: Financial Express Analytics, Total return, gross of fees, as at 31st August 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.
Fund performance in August was mixed. As expected there was a divergence between bonds and equities with Allianz Gilt Yield rising 4.92%, not only proving resilient in falling markets but also benefiting from strong demand for government bonds. Corporate bonds also did quite well with L&G Sterling Corporate Bond Index returning 2.23% and iShares Corporate Bond Index rising 1.97%. By contrast, UK equities fared poorly with declines of over 3% in all our UK fund holdings.
Economic growth is stuttering but other measures of economic health such as the rate of unemployment, consumer spending and inflation remain in reasonably good shape. The US Federal Reserve has further scope to cut interest rates which will help US corporates at a time when they are facing a squeeze on their margins from lower top-line revenue growth and rising wage costs. Consensus expectations for US earnings growth of 10% in 2020 may prove to be too high but there is still scope for companies to generate positive earnings growth in the quarters ahead and those with stronger balance sheets may well fare better.
As we have discussed before there is little merit in trying to time markets and raise cash only for it to provide a drag on returns. Even if markets do fall, sentiment is often so depressed that it takes a brave investor to deploy cash that has previously been sitting on the sidelines. We remain comfortable that we have the right mix of assets, geographical exposure and investment styles across the different risk profiles to ensure that over the longer term clients have the best possible chance of achieving their investment goals.
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 September 2019