Investment Bulletin:
August 2019

This month:

Wealth management experts examine the real prospects for the global macro economy as global trade wars continue to heat up, arguing that while caution is warranted, fortune may favour the brave in select investment opportunities.

Expert investment views:

Investors urged to avoid knee-jerk reactions to political headlines

A possible market correction warrants caution, but not gloom

Bet hedging wise with Brexit resolution set to go to the wire

Market over-reactions could provide opportunities for the brave

Featuring this month’s experts:

  • Arbuthnot Latham Private Bank
  • James Hambro & Partners
  • Quilter Cheviot Investment Management
  • Seven Investment Management (7IM)

1. Far from ordinary

Insights from:

FWAM_Insight_25

Ordinarily, investors might expect a US interest rate cut to be followed by equity market strength and a weaker US dollar, however, these are clearly not ordinary times. In what has been a momentous pivot, the market has moved back into an “easing” mind-set, so much so that a mere 25bps cut was simply not enough.

Despite this latest move from the US central bank, the macroeconomic picture is not all doom and gloom. Most economies remain in expansionary, albeit slowing, growth territory and history would suggest that easing at a time like this should be supportive in the medium-term at least. The most recent bout of market volatility could be justifiable: a simple correction following one of the strongest starts to the year for equity markets since 1987, plus the ongoing risks in the form of trade negotiations in one guise or another.

We see resolutions on the horizon, both in the UK and US as elections draw ever closer, and will look to take advantage of opportunities as they arise

These political feuds can have spill-over effects for global economic growth, but it should be remembered that policy-makers are acutely conscious that the voting public tends to prefer periods of economic strength.

As stewards of our clients’ wealth, our job is to avoid making knee-jerk reactions to political headlines and allocate portfolio assets to areas where we see value and where diversification benefits can be drawn. We see resolutions on the horizon, both in the UK and US as elections draw ever closer, and will look to take advantage of opportunities as they arise.

Arbuthnot-Latham - Colin MacKenzie

Colin MacKenzie

Director, Investment Management, at Arbuthnot Latham & Co., Limited

2. The lull before the storm?

Insights from:

James Hambro & Partners

It has been a strong year to date, with most markets enjoying mid-teen growth. As the earnings season enters its last lap, the majority of companies that have reported have declared earnings and profits ahead of expectations. What is there to worry about?

First, we should remember that this positivity comes on the back of a terrible final quarter in 2018. Many companies, which had been promising 10% growth levels a year ago, started 2019 with modest, even zero-growth, ambitions. They have beaten low expectations.

The global macro economy has been decelerating – trade wars haven’t helped – and China, particularly, has slowed, but there is evidence we are nearing the bottom

The market has been buying on the hope of a US interest rate cut, which has now come. No more seem imminent. When you look closer, the companies that have prospered recently are the “quality compounders” that we favour in portfolios – resilient businesses that just keep kicking out the dividends and patiently growing. But many look pricey now. Cyclical companies, like housebuilders that rely on a positive economic buzz, have struggled.

The global macro economy has been decelerating – trade wars haven’t helped – and China, particularly, has slowed, but there is evidence we are nearing the bottom. As we head into our next asset allocation meeting on the back of a very strong run in equity markets, we have to ask where the next good news is going to come from. A resolution of the US China trade war? A Brexit resolution? A rebound in economic momentum?

For now, many investors seem to be holding money back from equity markets, worrying about a correction, or worse. We are not gloomy, but we are cautious.

James Hambro & Partners - Mark Leach

Mark Leach

Portfolio Manager at James Hambro & Partners

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Top Tip

DIY investors following the old adage to “Sell in May and come back again on St. Leger’s Day” may be in for a real shock looking at their portfolios come 12 September. The increasingly fiery exchanges seen in the current global trade wars have caused seismic market movements, underscoring how vital it is to stay on top of market developments at all times – and why, for many people, this becomes too much over time. Delegating to a professional invariably yields better results, and gives greater peace of mind, so why not see what a wealth manager could achieve for you.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. The Brexit balancing act

Insights from:

China, Currency, FED, Interest Rates, Value Investing

The first few weeks of the Boris Johnson administration suggest he is not bluffing when it comes to a no deal Brexit. The rhetoric, composition of the cabinet, and policy announcements all portray a government battening down the hatches and No. 10 insiders believe the EU will not blink until its mid-October summit, if at all.

The conundrum for UK investors is how to position portfolios. There is a very obvious way to protect against the threat of a no deal exit, and that is to buy overseas assets. If you invest in US shares, for example, you effectively swap pounds for dollars. Had you done so at the beginning of March, and then sold back into pounds at the end of July, you would have made almost twice the return of a US investor who had kept their money in dollars.

All this makes Brexit a fine balancing act when managing investments, necessitating an understanding of how every part of your portfolio will perform in each scenario and how it all fits together

If we do see a positive Brexit outcome however, overseas exposure could potentially hold back performance as the pound rises. A good Brexit outcome could see the pound appreciate by around 10-20%, which would leave overseas investments denominated in dollars heavily exposed.

All this makes Brexit a fine balancing act when managing investments, necessitating an understanding of how every part of your portfolio will perform in each scenario and how it all fits together. There are things you can do to tilt the odds in your favour, and we currently like investment trusts trading on a discount like the Mercantile Investment Trust. The trust invests in UK businesses and the price presently trades at a bigger discount to NAV than usual. A good Brexit deal would likely see domestic assets perform strongly. It should also help the discount on the trust to narrow back to more normal levels, providing a “double win” for investors.

Quilter Cheviot - Nigel Olliff

Nigel Olliff

Investment Manager at Quilter Cheviot Investment Management

4. 44 words, three days and $4 trillion

Insights from:

Investment Bulletin: February 2015 - Find A Wealth Manager

We had three days of terror at the start of this month. Between its high on the morning of Thursday 1st August and its low on the afternoon of Monday 5th, the S&P 500 fell by 6.4% – the sharpest fall all year – and global stock markets lost about four trillion dollars.

And, as usual, there was a scary story – trade and technology wars, Donald Trump’s 44-word tweet on 1st August about new tariffs was one of the most expensive communications in history.

We are uneasy about what’s going on in the US, since it seems to be shifting towards economic policies that are designed to benefit its narrow interests at the expense of the rest of the world. This could have long run implications for company supply chains, profitability and global growth – most of which are negative.

We reckon that long-term investors should not get caught up with short-term movements in financial markets. Markets are notoriously jumpy, and a few bad days say very little about the future

As long-term investors, though, our long-term view of the world has not changed in the last week. We don’t think that a global recession is looming. Recent economic numbers have been weak but not disastrous. While trade tensions are likely to rumble on at least until the US election late next year, we think it’s in the interest of all sides to avoid a blow-up.

We reckon that long-term investors should not get caught up with short-term movements in financial markets. Markets are notoriously jumpy, and a few bad days say very little about the future. Moreover, markets often overreact, which can provide opportunities to the brave. If markets continue falling, we’d be more inclined to buy rather than sell.

Seven IM - Terence Moll

Terence Moll

Chief Strategist at Seven Investment Management (7IM)

Important information

The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

We always advise consultation with a professional before making any investment decisions.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.