Investment Bulletin: November 2018

This month:

October’s market falls may have made investors jittery, particularly over the US, but the professionals are calling for calm. In fact, many are seeing opportunities amid a maelstrom of rising risks.

Expert Investment News:

Markets signal now might be a good point to invest

“Value” stocks and a “quality” strategy stand to gain

Private lending and market-neutral hedge funds prove their worth

Professionals advise “measured and proactive portfolio management”

Managers mull the impact of the National Living Wage hike

Interest rates and trade wars top investors’ US concerns

Featuring this month’s experts:

  • Cazenove Capital
  • Quilter Cheviot Investment Management
  • Canaccord Genuity Wealth Management
  • Blu Family Office
  • UBS
  • Psigma Investment Management

1. Resist the call to cash

Insights from:

Quilter Cheviot

October was a difficult month for investors. A range of issues came to the fore, including the trade dispute between the US and China, slowing global growth and – to a lesser extent – rising US interest rates. 

Reading this, some might be tempted to throw their hands up at this point and move their investments to cash. Corrections of 10% in markets are par for the course when it comes to investing and are a normal part of bull markets. Since 1990, for example, UK equities have fallen by more than 10% on 11 separate occasions. Only two of those have become serious instances where investors have lost more than 20% in a bear market.

Reading this, some might be tempted to throw their hands up at this point and move their investments to cash. But if you are a long-term investor, this is exactly what you shouldn’t do.

At current levels, markets are offering a relatively cautious view of the world, with risks around trade disputes being priced in to a certain extent. You could make the argument that the current environment is a good point to invest from a long-term perspective. US equities have seen their third largest calendar year fall in valuations since 1976, partly driven by company shares becoming less expensive, but also because they have grown their earnings by over 20% this year.

While this rate will slow in the coming months, it should remain positive.  A full-on trade war between the US and China is clearly a concern, but the US Administration’s stance is reaching the point where it will start to affect American consumers. That might make Trump pause as he starts to campaign for re-election.

David Henry - Quilter Cheviot

David Henry

Investment Manager at Quilter Cheviot

2. Opportunity in the uncertainty

Insights from:

Investment Tips, Investment

Looking back, October was undoubtedly challenging for equity investors, with global equities displaying their worst monthly performance since May 2010, ending the month down 7.6% according to the MSCI All Country World Index.

Although a recent rally helped recover losses, this volatile trading environment reflects how global markets continue to contend with a high level of uncertainty. As we approach the festive season, rising interest rates, a maturing cycle, divergent economic indicators, and the persistent US-China trade dispute will all weigh on investors’ minds.

While investors with high sensitivity to short-term drawdowns should remain vigilant amid the uncertainty, for those with a medium to longer-term time view, the aftermath of the recent sell-off also presents a number of potential opportunities for the year-end and beyond.

We recently added to our moderate overweight on global equities in our tactical asset allocation. In our view, fundamentals remain good while valuations have also become more attractive after the sell-off. While economic growth will slow slightly next year, we still expect growth to continue above-trend and have upgraded global GDP growth from 3.7% to 3.8% for next year.

There are three key areas we think investors would be well-advised to heed:

We advise investors to consider buying “beaten up” stocks. We have screened for stocks in the US and Europe that have fallen more than the broader market during the sell-off, but still have strong corporate fundamentals.

Next, we note that value tends to outperform growth when economic growth is strong, so investors should consider tilting toward value at this time. Sector considerations are also an important driver of our value overweight – globally, we currently overweight energy and financials.

Finally, we favour a quality strategy, focusing on companies that tend to be more resilient in volatile markets or in weaker or declining markets.

As we near the end of the business cycle, amid rising volatility, we see a global sector-neutral quality style as well-positioned to outperform the overall market in the year ahead

As we near the end of the business cycle, amid rising volatility, we see a global sector-neutral quality style as well-positioned to outperform the overall market in the year ahead.

We highlight this theme as particularly relevant to the UK market, where we focus on UK companies with a quality tilt.

The short-term outlook remains uncertain. That said, as 2018 comes to a close we are watching catalysts that would suggest the investment environment is becoming more encouraging. For those with a medium to long-term investment horizon, this volatility can be seen as an opportunity.

Investment Tips, Investment

Geoffrey Yu

Head of the UK investment office at UBS Wealth Management

3. Our thoughts on October

Insights from:

Blu Family Office

October was quite the month for global markets with equities, corporate bonds, real estate and commodities experiencing severe losses of up to 10%, in some cases. As usual, the media instilled a sense of panic in investors as they forewarned of possibly more ills to come. If we rewind back to February, we experienced a similar sell-off and, funnily enough, talks of a pending recession became imminent back then, as well.

So, what are our thoughts on the current situation? For one, what is happening now is neither a forbearer of a new trend, nor is it any reason to change the way you think about the world. Two, these situations actually arise more often than we think – which is why if you invest across the entire investment universe and therefore also hold investments that are not correlated to the more traditional asset classes, there is no sense to panic at all.

If you invest across the entire investment universe and therefore also hold investments that are not correlated to the more traditional asset classes, there is no sense to panic at all

One of our favourite investments is in private lending (an alternative to the public bond markets), which was completely unaffected in October and ticked along as normal, providing a great source of fixed income. Our allocation to market-neutral hedge funds was also completely unaffected, as these strategies, by the very name, have no exposure to market direction. So, when a scenario like October happens, we can take profit in some of our investments and buy up equities, real estate and commodities at their nicely discounted prices. For us, this seems to be a much easier endeavour rather than trying to predict the future.

Tom Tardiff - Blu Family Office

Tom Tardif

Associate at Blu Family Office

4. Calm is crucial as risks rise

Insights from:

Psigma Investment Management

The core “cautious” message we have held this year hasn’t changed much in the last month, even if we have started to see better value being reflected in asset prices around the world and certainly some of the complacency has started to be blown off of markets. It remains an extremely challenging period for investors and global macro risks have risen; from a global macro perspective this is the most concerned about markets we have been in a decade.

For now, we are comfortable with our investment strategies and have “stressed-tested” our portfolios for exactly such scenarios as those we are currently experiencing. Our view from the start of the year was that we expected “regime change” and sell-offs such as this one ongoing and that we suffered in Q1 were likely. Now is not a time to panic, but rather pursue a path of measured and proactive portfolio management.

Now is not a time to panic, but rather pursue a path of measured and proactive portfolio management

We remain opening to tweaking our portfolios to reflect shifting market conditions and excessive moves in valuations. So far, all of our selected strategies and individual investments have performed exactly as we expected them to. There have been no negative surprises over the last month or so and all of our hedging instruments have offered significant protection.

The list of things to be worried about has grown over the last few months. The political backdrop is challenging, geopolitical risks are extremely high, economic growth expectations have fallen, cracks have formed in global equity markets and global corporate profits are not currently providing a positive impetus to markets. Markets have also become technically unhealthy. At the same time, we are treading cautiously with our investment strategies, but willing to change strategy proactively should conditions improve or better buying opportunities present themselves.

Thomas Becket - Psigma Investment Management

Thomas Becket

Chief Investment Officer at Psigma Investment Management

5. Where wage hikes are likely to weigh heavy

Insights from:

Canaccord Wealth Management

In October’s Budget, the Chancellor, Philip Hammond, announced that the national living wage, the statutory minimum wage for those aged 25 and over, will rise 4.9% from 1 April 2019 from £7.83 to £8.21. Whilst this was welcome news for around 2.4 million workers, it wasn’t as good for employers and investors. A higher wage bill has to be funded somehow, so it could result in higher prices for customers, money could be shaved from directors’ stipends or research and development funds, and it could also hit shareholder dividends.

We thought it would be interesting to run a screen from Quest (Canaccord Genuity’s proprietary equities tool) to see the consumer companies with the highest percentage of wages to sales, as these will be affected most. Firms in the hotels, restaurants and leisure sector fare the worst – such as Greggs, the Restaurant Group, and JD Wetherspoon’s – along with speciality retail companies such as Halfords and Pets at Home.

A higher wage bill has to be funded somehow, so it could result in higher prices for customers, money could be shaved from directors’ stipends or research and development funds, and it could also hit shareholder dividends

Take Greggs. Traditionally a company that is very much seen as a bellwether of the high street food trade, it is expected to be hit pretty badly by this rise in the National Living Wage. Its market capitalisation tops £1.1 billion, but with over 21,000 employees, and a wages bill that is 38.3% of total sales, its percentage decline in gross profit (operating margin) if wages rise 5% is a whopping 24%. It stands to reason that something will have to give.

Here is our top ten of companies affected by the rise in the national living wage: Greggs; Restaurant Group; JD Wetherspoon; Halfords; Devro; Pets at Home; Hotel Chocolat; Mitchells & Butlers; Patisserie; and Fuller, Smith & Turne.

Simon McGarry - Canaccord Genuity Wealth Management

Simon McGarry

Senior Equities Analyst at Canaccord Genuity Wealth Management

6. When America sneezes, we all reach for our handkerchiefs

Insights from:

James Hambro and Partners

America has been dominating investors’ thoughts lately. In October the S&P 500 Index suffered an intra-month tumble of 10%. It is too early to say if this “sneeze” was a one-off or the herald of a stinking cold. Two issues stand out: interest rates and trade wars.

Markets are assuming four rate rises next year and two more in 2020. It means we are heading to the point where cash becomes more attractive relative to most other asset classes, which could mean more volatility for American equities and valuations coming under further pressure.

US companies are undoubtedly worried about their supply chains and cost base. Our research suggests US distributors are bearing nearly half the costs of the first wave of Trump’s tariffs on Chinese firms

The US economy looks healthy and recent earnings growth from American companies was buoyant, but investors dwelt on disappointing sales growth and increasing margin pressures, fretting about the global economy generally and the odds of a recession in the US the year after next.

Tariffs may continue to be a headwind. US companies are undoubtedly worried about their supply chains and cost base. Our research suggests US distributors are bearing nearly half the costs of the first wave of Trump’s tariffs on Chinese firms. There is now a labour shortage, too – particularly noticeable in industries like trucking.

We have been keeping higher levels of cash for several months and declined the opportunity of “Red October” to reinvest any. We are looking instead for opportunities to rotate out of expensive high-growth companies and into more fairly valued defensive stocks offering attractive dividends. Handkerchiefs at the ready!

James Horniman - James Hambro & Partners

James Horniman

Partner and Portfolio Manager at James Hambro & Partners

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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