During one-month period to 29^th March 2019, major equity markets registered small gains, climbing by 0.35% overall and rising by 11.44% since the beginning of the year. The VIX index fell 4.87% to end the period at 13.87. Fixed interest products rose in price terms, gilt yields falling to below 1% at the time of writing, with riskier fixed interest instruments having a mixed performance. Sterling weakened slightly over the month but remains ahead of most major currencies since the year-end. Precious metals had a poor month while oil, copper, platinum, palladium and iron ore occupy the year to date price gains, generally on various supply issues.

The European Central Bank responded to slowing economic growth by maintaining interest rates at current low levels and announcing a new round of bank loans. Political events were not in short supply as Macron, in France, continued to face civil unrest and other governments faced growing nationalist pressures. It should also be remembered that The EU faces important elections in May. US market watchers continued to grapple with ongoing tariff discussions, Federal Budget concerns, North Korean meeting stalemate and Trump’s personal issues. US economic data has indicated a slower patch, while corporate results/forward looking statements have taken on a more cautious tone. Official interest rates were increased in December to a range of 2.25%-2.50% much as expected, but recent Fed minutes and statements, point to a much more dovish stance.  In the Far East, China flexed its muscles in response to Trump’s trade and other demands while relaxing some bank reserve requirements and contemplating other measures to help the slowing economy. Japanese economic data reflected a recent bout of natural disasters while Shinzo Abe consolidated his political position. At the BoJ meeting, the current easier fiscal stance was reconfirmed.

The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation as expected, but poor relative GDP figures (just 0.2% growth in Q4) and deteriorating property sentiment, both residential and commercial. Recent retail data shows mixed month to month trends, some “weather related”, but anecdotal evidence from both physical retail centres and online companies e.g.Asos show a distinctly weaker trend over recent months. Market attention, both domestic and international is clearly focussed on ongoing BREXIT developments and their strong influence on politics. Both the Chancellor and Bank of England Governor have made frequent references to the unsettling effects of any unsatisfactory Brexit outcome. The actual situation remains very fluid, and, as I write, the chances of a long delay have increased.

Aggregate world hard economic data continues to show 2019 expansion of around 3.0%, although forecasts of future growth have been reduced in recent months by all the leading independent international organizations. Fluctuating currencies continued to play an important part in asset allocation decisions, volatile sterling being a recent example, while some emerging market currencies have been exceptionally volatile e.g. Turkey.

Equities

Global Equities rose 0.35% over the month, the FTSE ALL World Index gaining an impressive 11.44% since the year end, albeit following a very weak quarter. The UK broad and narrow market indices, both rose by over 2% over the period, but lag world equities, in local currency, since the beginning of 2019. Japan posted a poor performance in March and now shows an underperformance of approximately 6% against world equities over the first quarter of the year. The VIX index which declined 45% since 31^st December, now stands at a level of 13.87   

UK Sectors

Sector moves over March 2019 featured strength in the areas of consumer stocks and telco’s while utilities slipped on certain political and pricing concerns. Over the quarter, mining, consumer and Life Assurance lead the UK sectors. First indications show that “average” UK All Company unit trusts are performing broadly in line with the main indices, Source (Trustnet). Balanced funds are showing three month returns of about 4.8% (Trustnet)..or 2.2% (FTSE Private Investor Series) .

 Fixed Interest

Gilt prices fell rose over the month, the 10-year UK yield standing at 0.97% currently.  Other ten-year yields followed similar trajectories closing the month at US 2.39%, Japan- 0.09%, and Germany -0.17% respectively.  UK corporate bonds rose   1.90 % in price terms ending March on a yield of approximately 2.59%. Amongst the more speculative grades and convertibles there were gains for US High Yield, but Emerging Market bonds showed price falls. Floating rate bonds showed little change over the month, reflecting more dovish interest rate sentiment.  See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (many yielding around 6%) from over 10 different asset classes is available.

Foreign Exchange

A busy period for the major currencies with falls for sterling on all major crosses over the month but showing useful gains since the year-end. Currency adjusted, the FTSE World Equity Index ended the quarterly period up 8.96%, just ahead of the major UK equity indices. On a sterling adjusted basis, the Japanese and German indices both lag the world averages by over 4%.

Commodities

A generally mixed period for commodities with losses by the PGM group, while oil and iron ore showed supply related gains. Since the beginning of this year, oil and iron ore show significant double-figure price gains.

Looking Forward

Over the coming months, geo-political events and Central Bank actions/statements will be accompanied by the first quarter reporting season, where forward looking statements will be scrutinised even more than the historic figures, at this advanced stage in the cycle. To some extent, the, slower economic growth forecasts that are appearing, will inevitably lead to some scale-back in corporate profit projections, although there may be offsetting fiscal and monetary effects. It will also be interesting to see if recent bond yield declines and yield curve inversions are accentuated.   

 US watchers will continue to speculate on the timing and number of interest rate hikes during the 2019/2020 period while longer term Federal debt dynamics and trade” war” winners/losers will affect sentiment. Corporate earnings growth will be subject to even greater analysis after a buoyant 2018, amidst a growing list of obstacles. Additional discussions pertaining to North Korea, Russia, Ukraine, Iran, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment may be calmer after recent political and economic events although international events e.g. exchange rates and tariff developments, will affect equity direction. There is increasing speculation that China may announce more stimulative measures. European investment mood will be tested by economic figures, EU Budget discussions, Italian bond spreads, German, French and Spanish politics, and reaction to the migrant discussions. It should also be remembered that EU elections and change of ECB Chairman are expected this year.

Hard economic data and various sentiment/residential property indicators are expected to show that UK economic growth has continued to slow and any economic upgrade over current quarters appear extremely unlikely. The UK Treasury and the MPC have both produced rather negative economic medium-term projections, whatever the Brexit outcome!  It is highly likely that near term quarterly figures will be distorted, and general asset price moves will be confused, in my view, by a mixture of currency development, political machinations, international perception, interest rate expectations.

On a valuation basis, most, but not all, conventional government fixed interest products appear expensive against current economic forecasts and supply factors and renewed selective bond price declines and further flat performance should be expected in the medium term, in my view.However,sharper than expected economic slowdown forecasts, and any equity volatility could support bond prices from time to time.

Equities appear more reasonably valued after recent price falls, but there are wide variations. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates, in the longer term and growing headwinds in several areas. Helped in no small part by tax cuts, US companies showed earnings growth of around 20% in 2018, and the current quarter is widely expected to be considerably lower than that. ‘Misses’ are being severely punished e.g. Caterpillar,3M Facebook, General Electric, Kellogs, Kraft, Twitter, Nividia etc. Accompanying corporate outlook statements are being carefully scrutinised.   

In terms of current recommendations,

Depending on benchmark, and risk attitude, first considerations should be appropriate cash/hedging stance and the degree of asset diversification (asset class, individual investment and currency).

An increased weighting in absolute return, alternative income and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate, including some outside sterling. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are still rather high. Ongoing and fluid tariff discussions, as well as growing regulation could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers, Chinese exporters, selected US tech shares etc etc.

• I have moved UK to an overweight position for the first time in over two years. Further detail will be available in the quarterly. However, ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings. Extra due diligence in stock/fund selection is strongly advised.
• Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals, though watch regulatory concerns, and many financials are showing confidence by dividend hikes and buy-backs etc. Over recent months, value stocks have been staging a long overdue recovery compared to growth stocks. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson,Intu), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda), leisure (Whitbread), media (Sky), mining (Randgold) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
• Continental European equities are preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments and slowing economic growth need to be monitored closely. I suggest moving the European exposure to “neutral “from overweight. European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully and remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the 2017 and 2018 outperformance relative to world equities. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.FX will play an increasing role in the Japanese equity decision.
• Alternative fixed interest vehicles, which continue to perform relatively well, in total return terms, against conventional government bonds, have attractions e.g. preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher riskg. EnQuest. These remain my favoured plays within the fixed interest space. See recent note
• UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. Bank balance sheets are in much better shape and yields of 6%-7% are currently available.
• Alternative income and private equity names exhibited their defensive characteristics during 2018 and are still favoured as part of a balanced portfolio. Reference could also be made to the renewable funds (see my recent solar and wind power recommendations). Both stocks registered positive capital returns over 2018 on top of income payments of approx 5%. And are still strongly recommended. Selected infrastructure funds are also recommended for purchase but be aware of the political risk. The take-over of JLIF highlights the value in the sector!
• Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g. (Hammerson, Intu). Subscribers may read more on this subject in my latest quarterly review. The outlook for some specialist sub sectors e.g. health, logistics, student, multi-let etc and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property plays e.g SERE.
• I suggest a very selective approach to emerging equities and would continue to avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term and much of South America is either in a crisis mode g. Venezuela or embarking on new political era e.g. Mexico and Brazil. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years, and there are currently large inflows into this area following the price weakness of 2018. One additional factor to consider when benchmarking emerging markets is the large percentage now attributable to technology. A longer-term index argument is also being made in favour of Gulf States, although governance issues remain a concern.
• The current relatively low level of the VIX (too low in my view!) presents various option and other derivative strategies,either used “defensively” against fully invested equity positions or “aggressively” by way of taking naked positions  to exploit any fall in index or stock prices.

Full quarter report available to clients/subscribers and suggested portfolio strategy/individual recommendations will be available soon. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, defensive list, hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.

Feel free to contact    regarding any investment project.

Good luck with performance!

Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)

1^st April 2009