Investment Bulletin:
June 2019

This month:

Wealth management experts weigh up the risks of recession amid Trump’s trade wars and other geopolitical risks. Government bonds, commodities, UK equities and the prospects for sterling are also put under the microscope.

Expert investment views:

Experts warn of mounting recession risks

Trump’s trade war set to take a toll on growth

Investors urged to weigh FTSE composition carefully

Commodities investing is called into question

Dividend investors recommended a cyclical/defensive approach

Government bonds branded an asset class to avoid

Managers keep cash at the ready to snap up bargains

A sharp rise in sterling’s value comes onto the risk radar

Featuring this month’s experts:

1. Recession risks running high

Insights from:

Psigma Investment Management

The most recent move that we have taken within our clients’ portfolios has been to marginally reduce risk after a very strong start to the year for global asset markets.

The recovery we have seen so far this year reflects the fact that asset markets became “oversold” at the end of 2018 and they have bounced back this year, aided in no small part by some soothing comments from central banks who have promised further support, with recent comments suggesting that policy loosening is imminent.

This help might well prove necessary later this year, as most economic evidence we have seen over the last few months is hinting at a global economic slowdown. We hope that the downturn we are currently experiencing gives way to an improvement as we head through the year, but for now we continue to be very “open-minded” and our investment strategies remain balanced and diversified, reflecting a higher level of uncertainty both at home in the UK and across the global economy, as a whole.

We hope that the downturn we are currently experiencing gives way to an improvement as we head through the year, but for now we continue to be very “open-minded” and our investment strategies remain balanced and diversified, reflecting a higher level of uncertainty both at home in the UK and across the global economy, as a whole

Going forward there are still an array of issues that need to be resolved before we can sound the “all clear” for risk assets. From a headline perspective, economic growth around the world is slowing. Whilst calls for a “recession” might be premature, there is clear evidence of the global economy gliding down to lower structural rates of growth, which is totally in line with our long-term forecasts.

“Are recession risks real?”, is the question we should be asking ourselves. Certainly, they are higher than they have been for many years, with the cyclical factors of companies losing confidence, tariffs impacting business decisions mixing with the structural issues of heavy debt loads across the developed world and unhelpful demographic trends.

Investment Tips, Investment

Thomas Becket

Chief Investment Officer at Psigma Investment Management

2. The long view on Trump’s trade war

Insights from:

brown shipley

With the threat of a full-blown trade war, targeting not only China but possibly Mexico, Japan and the entire continent of Europe, the President of the United States is putting the fate of the global economy and international financial markets at risk. In our base case scenario, we do not expect this situation to be resolved in the near future, particularly considering there is bipartisan support to be tougher on China. Realistically, however, any outcome will depend more on the patience of the latter and how markets react more widely.

This outcome enables Trump to get the lower rate environment he “pushed” the Fed towards, creating a better environment for GDP and possibly also equity markets as the 2020 election approaches. However, should the conflict persist into the first quarter of next year – and possibly into the longer term if Trump is re-elected – continuing uncertainty will begin to take its toll on growth.

Elsewhere, as proven in recent weeks, there are merits in holding government bonds at this time – even at low yields – for when equity markets sell-off and credit spreads widen

This would imply at least one US rate cut. China may also react with lower rates and reserve requirements in addition to possible further fiscal stimulus. That said, lower rates could actually support equities after an initial repricing of lower growth expectations.

Elsewhere, as proven in recent weeks, there are merits in holding government bonds at this time – even at low yields – for when equity markets sell-off and credit spreads widen.

Ultimately it is always difficult to forecast political developments, therefore our advice for investors is to keep a long-term view and maintain sound diversification by geography, currency and asset class across portfolios.

Brown Shipley - Cyrique Bourbon

Cyrique Bourbon

Asset Allocation Strategist at Brown Shipley

3. A different way of viewing the world

Insights from:

Investment Bulletin: February 2015 - Find A Wealth Manager

The FTSE 100 is often referred to as the UK’s premier equity index. This is misleading: 80% of its total sales are made outside of the UK.

The FTSE 100 includes the largest 100 companies that are listed in the UK. A listing in the UK means that a company will have an office here, and its shares will trade on the London Stock Exchange, priced in sterling. Some FTSE 100 companies such as Sainsbury’s do most of their business in the UK. However, many are multinationals that do almost no domestic business here. Their London listing may be a historical accident, or simply a matter of convenience.

The FTSE100 includes a great many global companies. Investing in it on the basis of your views on the UK economy alone makes little sense, and the years 2014 and 2015 illustrate this.

The FTSE100 includes a great many global companies. Investing in it on the basis of your views on the UK economy alone makes little sense, and the years 2014 and 2015 illustrate this

Over the period, the UK and US economies both grew at around 2.6% per year. Interest rates and inflation were similar. But those two years were bad for oil prices, which fell by more than 60%.

From an economic standpoint, oil is marginal to both the US and the UK economies. Yet in those two years the US equity market rose 11% while the UK equity market fell 8%. Why? The almost 20% difference in performance between the two indices had little to do with the economies of the two countries, and far more to do with the sectoral exposure of their stock markets.

Oil companies make up nearly a third of the FTSE 100 and fell by about 30% over 2014-15. This pulled the overall market right down. American energy and materials companies felt the same pain, but because they make up less than 10% of the US stock market the impact was less severe.

Expert Opinion, Financial Markets, monthly investment tips, Portfolio

Ben Kumar

Investment Manager at Seven Investment Management (7IM)

4. Our thoughts on investing in commodities

Insights from:

Blu Family Office

To diversify our holdings of stocks and bonds, investing in commodities seems like an obvious choice. Correlations are surprisingly low to equities, even accounting for the vast differences of, say, pork bellies versus copper. Performance can also be quite impressive at times and lest we forget the move in gold from 300 in 2000 all the way to 1,900 in 2012. Of course, the direction of travel can also go the other way, and we saw oil drop from a peak of 150 all the way to 35 in the last crisis.

So how should we invest in commodities and what are the nuances we have to be aware of, before acquiring real assets? Foremost, you cannot buy and hold commodities. If you had bought oil in 1980 and held it for 40 years, you would have underperformed equities by almost 1,000%. That is because commodities cost money to store them, there are no dividends and let’s face it, we are meant to use, eat or otherwise consume commodities. Or, when was the last time you saw two barrels of oil in your neighbour’s garage as part of their long-term investment strategy?

More so than any other asset class, you need to get your timing right to invest in commodities. And that means you need to actively trade your holdings of gold, copper or energy, otherwise the costs of owning the assets will eat away your returns over time

As a result, more so than any other asset class, you need to get your timing right to invest in commodities. And that means you need to actively trade your holdings of gold, copper or energy, otherwise the costs of owning the assets will eat away your returns over time. Buying and holding commodity ETFs is therefore not a good means to diversify portfolio risk, even if the correlations suggest otherwise. If you want exposure to the stuff we get out of the ground, then you are better off buying equities that specialise in mining or broking commodities. You still have to get your timing right, but at least you give yourself a chance to make some money.

Expert Investment Views,Investing Tips,Investment Tips, Brexit

Christian Armbruester

Chief Investment Officer at Blu Family Office

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Top Tip

This month’s experts have highlighted how traditional investment wisdom may not hold true in today’s environment. Commodities might not be the diversifier your portfolio needs and piling into treasuries may not be the wisest move for retirees seeking income. In a very challenging investment environment, talking to a professional is the fastest route to a portfolio suited to both your return ambitions and risk management needs.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

5. When trade talks go south, what next for UK equities?

Insights from:

Investment Tips, Expert Opinion

The news flow at present seems to consist of a never-ending series of headlines about the stop-start Brexit process and, most recently, the intricate manoeuvring in the Conservative Party leadership race.

Yet, all of these loom against the macro backdrop of global market reactions to Sino-US trade negotiations. Given that there is no clear way forward on Brexit for now, we turn our attention to this trade dispute. But what is the state of play for UK equities in this period of uncertainty?

The UK equity market has a relatively small exposure to the tech and industrials sectors, which are two of the most impacted in the trade dispute. As a result, the UK market naturally has far less exposure to the tariff conflicts than some other regions.  The FTSE 100’s main exposure to China is via its large mining exposure, while US exposure is largely through consumer staples and pharmaceuticals. As a result, the UK has performed better relative to other markets in recent trade dispute-driven sell-offs.

Earnings growth remains limited for the time being, if we take into account that a stronger pound could pose some risk and we are currently neutral on UK equities on a tactical horizon

Nevertheless, earnings growth remains limited for the time being, if we take into account that a stronger pound could pose some risk and we are currently neutral on UK equities on a tactical horizon.

It remains patently unclear how and when trade tensions will begin to untangle themselves, so we expect high levels of volatility to persist for the foreseeable future. As such, we see a combined cyclical and defensive approach to dividend investing as the best way to navigate these tricky waters.

UBS Wealth - Caroline Simmons

Caroline Simmons

Deputy Head of UK Investment Office at UBS Wealth Management

6. Blame the baby boomers?

Insights from:

James Hambro & Partners

Baby boomers get a lot of blame – they got the best pensions, they got cheap houses, they had free university education. But with 10-year treasuries yielding record lows they are taking some pain too.  

Treasuries, often referred to a government bonds, are essential building blocks of many pensions. They represent money lent by investors to government and have such a high chance of being repaid to the lender that the asset class has historically earned the soubriquet “risk-free”.

Do not believe it. Yields have crashed. You have to go to the US to find treasuries that can beat inflation (but take on a lot of currency risk for your troubles). The German bund promises an actual loss of -0.225%!

We see equities as offering the most attractive returns. Growth, momentum and quality stocks – our sweet spot as investment managers – look best placed to prosper. Financials or cyclical value stocks might struggle

So, what is driving prices up and yields so low? One theory is that baby boomers themselves are to blame (yet again). Investment lore dictates that you gradually move from equities to bonds as you approach retirement.

We think this is outdated, particularly following pension reforms in the UK (two thirds of investors now opt for drawdown and their money may need to continue working for them for another 30 years). But traditions die hard and with so many baby boomers approaching retirement, tidal waves of money are crashing in the direction of treasuries.

Where does this leave sensible investors? Avoiding these kinds of assets, we would argue. For now, we see equities as offering the most attractive returns. Growth, momentum and quality stocks – our sweet spot as investment managers – look best placed to prosper. Financials or cyclical value stocks might struggle.

With all the political shenanigans going on here and between the US and China, there is an argument for being marginally underweight equities and overweight cash. This is the positioning we have adopted across client portfolios, on the basis that there will be volatility ahead and this leaves us well positioned to pick up bargains. 

Billy Hughes

Portfolio Manager at James Hambro & Partners

7. Bracing for market volatility

Insights from:

Cazenove Capital

We have long been expecting to see higher volatility in markets and it has materialized over the past month. The trigger was the escalation in global trade tensions, with the US imposing tariffs on Chinese and – unexpectedly – Mexican goods.

While this may be a negotiating tactic to secure political concessions, the move emphasised the unpredictable nature of current US policy making and will do little to help business or consumer confidence. The developments will likely renew concerns about a US recession in 2020 and increase the downside risks to our outlook for positive but slowing global growth. Stock markets are now wary about the prospect of tariffs elsewhere, with speculation that European cars could be next.

If growth does slow significantly as a result of trade tensions, the Fed is likely to act to support the economy and cut interest rates. Bond markets are now clearly expecting such a move, potentially this year. This is a marked change from last December when the market was still expecting two interest rate rises!

Despite valuations looking attractive, we think that domestically-exposed UK equities are unlikely to make headway while Brexit uncertainty persists – which could be for many months

Closer to home, political developments have opened the door to a wider range of Brexit outcomes. As a result, sterling could become more volatile and move significantly from current levels. Despite valuations looking attractive, we think that domestically-exposed UK equities are unlikely to make headway while Brexit uncertainty persists – which could be for many months.

We have maintained our neutral exposure to equities. We still expect modest earnings growth this year but we are becoming more defensive and taking profits where appropriate. We are prepared for higher levels of market volatility and our higher-than-usual allocation to cash allows us to take advantage of investment opportunities that may arise as a result. We also remain well diversified, helping to reduce risk.

Caspar Rock, Cazenove Capital

Caspar Rock

Chief Investment Officer at Cazenove Capital

8. Sterling set to soar?

Insights from:

Wealth Planning, Wealth Protection

With Brexit a looming wildcard, clients’ queries have been resoundingly centred on this one issue.

Naturally, many assume one’s asset positioning should be defensive during times of heightened geopolitical conflict. However, history teaches a different lesson: geopolitics rarely impact equity markets over the medium to long term of 5 to 10 years. While risk assets such as equities will likely continue to be indifferent, the area most susceptible from Brexit headlines is the foreign exchange market, particularly a rise in sterling. As such, we have “hedged” (i.e. protected against loss via “insurance”) part of our global equity positions, and those in gold.

While risk assets such as equities will likely continue to be indifferent, the area most susceptible from Brexit headlines is the foreign exchange market, particularly a rise in sterling

A rise in sterling? Yes. Most UK clients – and investors in general – should be globally oriented, and unencumbered by home-country biases. Nonetheless, returns and performance are usually referenced in sterling terms. Given the global orientation, but local reference currency, these strategies are subject to foreign exchange fluctuations commensurate with their non-sterling exposure. For example, if sterling depreciates by 5% versus the US dollar, all US dollar holdings would be worth 5% more in sterling-terms, all else being equal.

These fluctuations have been largely beneficial over the last five years – and especially since the UK’s referendum to exit the European Union in mid-2016 – as sterling has depreciated, adding a tailwind to sterling-denominated performance. However, the opposite may be true going forward. Sterling is trading at historically low levels and is undervalued: a move back towards historical averages or “fair value” presents a risk in this context.

This risk may well manifest itself in a “deal” scenario, still the most reasonable possibility. Should that occur, a sharp rise in the value of sterling cannot be ruled out.

Fahad Kamal

Chief Market Strategist at Kleinwort Hambros

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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