The World In A Week - Waiting For The Turn
Although the year is still young, thus far into January markets have seen a broad continuation of the trends we observed in Q4 of 2019, and indeed for many of the last few years. US Equity outpaced other global markets by quite some margin, with the S&P 500 returning +2.21% in Sterling terms; although this was aided by a mild weakening in the British Pound against the US Dollar. The Price/Earnings ratio for the S&P 500 now stands at 26x on a trailing 12-month basis, as calculated by the Wall Street Journal, that is very expensive indeed on this measure.
Global growth equities have continued to outperform value equities (+5.8% vs +2.6% for the month to date), as they have done in the aggregate since the financial crisis. Again, valuations are stretched to extremes – although we generally view stretched valuations as opportunities to add value rather than risks to be avoided. As a result, we maintain our overweight to Global Emerging Market Equity into the New Year as it offers considerably better value than other equity markets.
On the Fixed Income side, we saw the rally in junk (or high yield) bonds extend from December into January as Global High Yield Debt rallied +0.9% in GBP Hedged terms last week. We are deeply sceptical that there is any opportunity to be had in high yield at current prices and maintain our underweight in favour of Investment Grade Credit. Emerging Market Local Currency Debt, which was one of our most successful positions last year, has pulled back marginally this month (-0.30%) but we remain bullish on the asset class in general and our Fund manager in particular.
On the macro side, we track the Composite Leading Indicators produced for each major economy by the OECD on a monthly basis. The latest data was released this morning and showed a moderate stabilisation in economic data across a range of developed and emerging economies. One among these was the UK, which is interesting in the context of a potential rate cut by the Bank of England. This would be highly premature in our opinion. Employment data is still robust, and while retail sales have been poor in aggregate, most of this is due to business models on the high street being disrupted rather than an underlying economic malaise.
We continue to remain focused on only taking risks for which we are adequately compensated, monitoring market developments for when trends might begin to turn and looking for tactical opportunities to add value to the portfolios.
The World In A Week - Big Headlines, Small Details
Geopolitics continued to grab headlines last week. The US-Iran conflict is currently the biggest source of instability for investors, although tensions showed signs of abating as the week progressed, with both sides relaying that retaliation was over. Despite the White House making noises regarding further economic sanctions, we do not expect further escalation around this specific situation. The cynic in us however believes that should Trump’s ratings deteriorate; we could see these tensions rekindled.
There was good news in the UK; following several days of debate, the Commons approved Boris Johnson’s agreement on how the UK would leave the European Union on 31st January 2020. This decision is now waiting for approval from the House of Lords. In what has been a long-awaited step forward, we are now set for intense discussion between the UK and Brussels, who cannot agree on how long discussions over the future relationship should last, with the chair of the European Commission voicing her concerns that it will be impossible to reach an agreement by the end of 2020. We think that it is highly likely that Boris Johnson will ask for an extension to the transition period by the end of the deadline, 30th June 2020, and that UK equity markets will subsequently rise.
Markets were buoyant last week, despite the tensions between Iran and the US. The most likely explanation for this is that Trump is due to sign the Phase I agreement with China in Washington on Wednesday, which will cement the foundations for the next phase of negotiations. While the downward pressure on global growth for the year ahead has relented, we must remind ourselves that the agreement has limitations, as most of the tariffs will remain in place.
The World In A Week - New Decade, Old Problems
We welcome not only a new year, but also a new decade.
At the start of last year, we stated that in our opinion, the main risks were Trade, Brexit and Central Banks. Last year was arguably dominated by Central Banks, with a synchronised easing around the globe, most notably in the US, where Jerome Powell executed a complete U-turn, neutralising the previous rate hikes under his tenure.
The baton has now been dramatically passed to politics, which in general behaved quite sensibly in 2019: the elongated drama surrounding trade with China and the US eventually got to Phase 1 and, in the UK, Brexit progressed up the next rung of the ladder.
However, 2020 has brought political uncertainty back to the fore. The hangover had barely dissipated when news that a drone strike by the US had killed one of Iran’s most powerful generals. The obvious fear is the assassination will ignite another major conflict in the Middle East, after Iranian Supreme Leader Ali Khamenei promised: “severe retaliation”. What form this will take is again, uncertain, but some sort of cyber-attack looks the most likely, particularly as we enter the US Presidential Election year.
Will Iran be the protagonist in this year’s election, as Russia allegedly became in 2016? The US Election was already high on the list of risks for 2020, along with many other political situations around the world, however this has certainly been escalated in our views.
Experience has taught us not to make knee-jerk reactions. This becomes increasingly difficult for the investor, with the media’s continued use of more volatile headlines, which are hard to ignore. Their remit is to get you to click on the article; our remit is to ensure you have a robust investment process as your foundation.
The World In A Week - The Year Of The Rat
An eventful week that saw the continued spread of the Coronavirus in China, the opening arguments of Trump’s impeachment trial and the 51st World Economic Forum in Davos.
The World Health Organisation have called for emergency action in China following 830 confirmed cases with 41 deaths reported so far. The Chinese city of Wuhan, home to some 11 million people has been inundated with new patients seeking treatment. A completely new hospital is set to be completed in the next 6 days and will house 1000 beds. This follows similar action taken in 2003 following the SARS virus outbreak. The timing is far from ideal as China celebrated its New Year on the 25th January and is in a period of stagnated growth. Economic activity is expected to drop significantly with reduced worker mobility and spending power, following the travel ban that encompasses 12 cities, affecting 35 million people. There has been a large-scale demand for surgical masks and gloves with more than 80 million masks sold. China’s Tencent has also cancelled the firm’s annual bonus release which gives employees the chance to meet chief executive Ma Huateng amid enhanced virus concerns.
The most recent chapter in the impeachment trial sees President Trump’s legal team present their case against his removal from power. The session was very brief with the main statements set for this upcoming week. However, it was clear that further evidence is needed to support any case for the removal of Trump, and this would certainly undermine the US political vote as the presidential election race gathers speed. Two-thirds vote of the Senate are required to remove the President from office, an event that has never happened in US Politics.
Climate crisis was once again the topic of discussion at the World Economic Forum in the ski resort of Davos, Switzerland. President Trump’s comments again sparked debate as he compared Tesla CEO, Elon Musk, to the great Thomas Edison. This follows the significant up-surge of Tesla shares which have increased by just over $300 in the last 3 months. Trump was also quick to boast his role in accelerating economic growth, with unemployment at its lowest rate for 50 years. Most notably, Greta Thunberg echoed her climate crisis call by encouraging global leaders to act immediately, further emphasised by US Vice President Al Gore, who compared the global crisis to the 9/11 event.