During one-month period to 29th 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.
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 31st December, now stands at a level of 13.87
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) .
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.
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%.
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.
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.
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)
1st April 2009