Investment Bulletin:
December 2019

This month:

It may be the holiday season, but much work is needed to position portfolios well for the uncertainties ahead. Here, experts from our panel of leading wealth managers explain their thinking around bonds, equities, commodities and more.

Expert investment views:

A discerning approach to bonds is advocated, with an emphasis on real yields

Investors are urged to think carefully about the liquidity profile of their portfolios

The merits of “following the herd” into expensive and en vogue equities are questioned

Featuring this month’s experts:

1. A balancing act

Insights from:

By confining their attention to equity market performance, investors could reasonably assume that everything in the garden is rosy. Recent low and stable volatility has provided ideal conditions for risk assets to perform well, building on what has already been a strong year for equities, credit and property securities. In contrast, safe havens, such as longer dated government bonds and gold have lost ground over recent weeks.

Furthermore, talk of an imminent US recession has abated. Improved investor confidence has prompted longer bond yields to rise and the US yield curve to normalise (i.e. “un-invert”).

Several factors combined to drive this shift:

  • Strong US consumer demand has helped the American economy maintain reasonable momentum
  • Several central banks have responded to slowing growth by easing policy
  • Investors are more optimistic regarding a “Phase One” US/China trade deal
  • Q3 corporate earnings have been stronger than expected

However, longer term worries continue to bubble away. Deflationary pressures as well as the growing number of populist political revolts remind us that all is not well beneath the surface. Nonetheless, our view is that the global economy is merely experiencing a period of slowdown, rather than the beginnings of anything more sinister.

In the UK, our central expectation is that Boris Johnson will achieve a majority and the UK will leave the EU with a withdrawal agreement.  That said, a hung Parliament is also possible and if a Corbyn-led coalition forms amongst all the anti-Brexit/pro-referendum parties, UK financial markets and sterling would come under significant pressure.

Overall, we remain moderately cautious about the immediate prospects for financial markets, maintaining higher than normal cash positions to provide some protection and room for manoeuvre

Overall, we remain moderately cautious about the immediate prospects for financial markets, maintaining higher than normal cash positions to provide some protection and room for manoeuvre. We have recently raised our sell target for equities, but remain prudently underweight. Within bonds, we prefer short duration, credit and the US (where real yields are positive) over long duration, government bonds and the eurozone, UK and Japan (where real yields are negative). We continue to bolster our alternatives allocation with investment trusts featuring relatively high dividend yields (typically 5-7%).

David McFadzean

Head of Investments at Nedbank Private Wealth

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Top Tip

It’s easy to become myopic about the wider investment outlook when there is so much uncertainty on your back yard, but taking a global view has never been more vital. So-called “home bias” is understandable, yet is likely to leave opportunities untapped (and risks unaddressed). A good wealth manager will help you see the bigger picture – and quickly too through our 3-minute search.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

2. The lowdown on liquidity

Insights from:

Liquidity matters, and for anyone who wants to simply get their money back from the investments they have made, the terms upon which that can be done are very important. It is why people love to buy stocks and bonds that are listed on exchanges. By the click of a button, the position is sold and the cash gets transferred back into our accounts.

But do we really need instant liquidity on all of our investments? Buying and selling stocks every day may be one thing, but we know timing is difficult. So, the only way to really invest sensibly is to buy and hold for the long term. And moreover, is there really ever any point when we want to sell everything at once? Numerous studies have shown that we may be able to take money off the table quite easily when we think that something may have gone wrong, but the hard part is: when do we get back in?

Numerous studies have shown that we may be able to take money off the table quite easily when we think that something may have gone wrong, but the hard part is: when do we get back in?

For the record, I turned bearish on the global economy in 2011, when the Eurozone crisis reared its ugly head. Thank goodness I don’t take macroeconomic views when investing because the markets have gone up some 200% since then. And I cannot tell you how many investors are now fretting over Brexit and the global trade wars. Should we really sell everything, run for the hills and start growing our own vegetables, because you know, we can liquidate all of our investments at an instance?

Liquidity matters, but not for your entire portfolio, as you will be missing out on many great investment opportunities that pay a (huge) premium for illiquidity. And, you might actually be very grateful that you couldn’t sell everything, when your timing goes horribly wrong.

Expert Investment Views,Investing Tips,Investment Tips, Brexit

Christian Armbruester

Chief Investment Officer at Blu Family Office

3. Beware “en vogue” equities

Insights from:

In equity markets we like “unloved” Japan, “untrustworthy” emerging markets and the “un-investable” UK; on the flip side, we question the merits of following the herd further in to expensive US equities and the en vogue “defensive growth” names that many feel comfort holding.

In bonds we are balanced but broadly eschewing the dubious merits of long-duration and low-yielding bonds and focused on specific opportunities. If our “boring” economic projections are correct, then defaults should remain low and the ignored parts of the fixed interest universe, namely lower-rated bonds and investments like Collateralised Loan Obligations, should recover as the bonds come towards maturity and fears recede.

In bonds we are balanced but broadly eschewing the dubious merits of long-duration and low-yielding bonds and focused on specific opportunities

Elsewhere we continue to preach the message of diversification. We expect gold equities to remain well bid, as central bankers pump the system with liquidity, whilst we also see the potential for commodities to clamber off the canvas, as long as an economic recession is indeed avoided.

Thomas Becket - Psigma Investment Management

Thomas Becket

CIO, Punter Southall Wealth

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.

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