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Investment Bulletin October 2019

04-November-2019
04-November-2019 15:58
in General
by Admin

 

Overview 

Markets appear trapped in an episode of Deal or No Deal. The uncertainties surrounding the China/U.S. trade talks, and to a lesser extent Brexit, dominate the outlook. Manufacturing worldwide is contracting, trade is vulnerable and corporate profits are under pressure. Many Treasury yield curves are signalling recession risks, and Chinese economic indicators are dubious at best.

 

It is worth appreciating the global economy is actually in better shape than the headlines would have us believe. There have been more than 25 global interest rate cuts since May 2019 together with fiscal stimulus measures. The hope is these should help. The silver lining in relation to this scenario; when the headlines scream ‘panic’, hidden gems and buying opportunities tend to surface.

 

The added concern, in recent years, is central banks have limited ammunition to fight a downturn. Interest rates are already low in Japan and Europe. The U.S. Fed has more scope to ease but still limited. Previous recessions have seen Central Banks cut rates aggressively, something that would be impossible this time. All of this can be factored in and is a potential profit centre within our strategies.

 

The Investment World Ahead?

We follow a total returns philosophy with a systematic strategic asset allocation coupled with a tactical overlay. Our modelling uses a range of economic and financial variables to estimate the strength of global economies and to forecast the probability of positive and negative pressures.

 

It is at these times, where the quality of the strategy shows through, we plan and expect to make a notable difference.

 

To help compare to the general stock markets, we use as a barometer the FTSE 100 Index Values. The figures below give details of the movements over short to medium-term.

 

          FTSE 100 Index Values

Term

Start Date

End Date

Change

Percentage

AER %

(Annualised)

1 Year

01.10.2018

01.10.2019

-1.81%

-1.8%

3 Years

01.10.2016

01.10.2019

6.68%

2.2%

5 Years

01.10.2014

01.10.2019

12.24%

2.3%

3 months

01.07.2019

30.09.2019

-1.19%

n/a

3 months

01.04.2019

30.06.2019

1.48%

n/a

3 months

01.01.2019

31.03.2019

8.19%

n/a

 

We have and are continually reviewing your portfolios leading to ongoing recommendations and associated actions.

 

There is a chance that the damage and declines have already been experienced. Personally, we believe it is impossible to predict, as there are multiple events occurring or at risk of occurring around the world. A path out of these woods involves accommodative monetary policy and a stable trade environment for businesses. The recession probabilities may lower back under the warning threshold if interest rates fall and/or macroeconomic and financial data does not deteriorate further.

 

Should We Curb Our Pessimism?

On balance, we think it is more likely that the combination of trade-war resolution and policy stimulus could see the global economy recover in 2020. The asymmetry of the different outcomes keeps us cautious until there is more clarity on the trade and stimulus outlook.

 

First, in contrast to manufacturing, service sector activity is still robust in most economies as we move into the fourth quarter of the year. Unemployment is low and consumer confidence is relatively high in the U.S. and Europe.

 

Second, policy stimulus is being ramped up with numerous central banks; the Federal Reserve has started easing and the European Central Bank (ECB) has restarted quantitative easing. China is talking more aggressively about policy stimulus, while fiscal easing is being debated in Germany and U.S. Treasury Secretary Steven Mnuchin has discussed possible tax cuts in 2020.

 

Third, an easing of trade tensions seems likely, even if only temporarily. Donald Trump has shown a tendency this year to de-escalate trade tensions. This has been typically whenever the equity market falls. He has an incentive to limit the trade-war damage to the U.S. economy ahead of next year’s election. To do this, he needs some form of trade deal before the end of the year.

 

Our Preferences

Our investment decision-making process points to a more cautious selection of assets, within designated risk profiles.

 

The trade war and China weakness have the global cycle under pressure. Our expectations are broadly balanced. We are not yet close to the level of generic market and media driven pessimism; ironically, that would trigger a contrarian buy-signal.

 

Quantitative Modelling Analysis

Rather than trying to predict the market, we follow a structured approach of multi-asset assessment, stress testing and historic back-testing. We believe this time of volatile mispricing supports our approach of systematic analysis with a tactical overlay philosophy.

 

Our intention, given time, is still to make a profit in-line with our expectations.

 

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice. 

(If you require personal advice based on your circumstances, please contact me.) 

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