September 2019 review
Despite the travails of the US-China trade dispute, Brexit and political shenanigans in the UK and Europe, financial markets were helped by the soothing talk and action of lower interest rates in the US and Europe. With US$17 trillion of bonds with negative yields in the world, notably in Europe, one questions the effectiveness of even lower rates in Europe. The outgoing head of the European Central Bank agrees, passing the baton of economic stimulation to European governments to be more fiscally expansive to avert a recession. Recessionary fears aren’t limited to Europe and recent economic data in the US has led to fears of recession there. To us that seems misplaced as away from the manufacturing sector, the service economy is in reasonable shape.
Against this backdrop, it is perhaps surprising that global equity markets posted positive returns while bonds generally gave back a little of their recent strong performance. As most developed economy bonds are negative in absolute or real terms, they remain of little interest to us.
Unfortunately, a small number of our alternatives to bonds performed poorly in September and caused our multi-asset portfolio to have a small negative return. Our global equity portfolio enjoyed a positive outcome of close to one per cent over the month, outperforming its relative peers in the IA Global sector.
As mentioned above, we believe that markets have become overly pessimistic over global economic growth. Yes, it is falling but fears of a widespread recession seem overblown, largely because manufacturing data gets all the headlines in the major economies whereas the service sector has become more influential and appears to be in reasonable shape. We are keen followers of money supply data as a proven leading indicator and evidence points to a bottoming out of lower growth in the second quarter of 2020. Tight labour markets have led to increases in average earnings, notably in the US, Japan and UK. Consequently, bonds look overvalued and we continue to avoid them. We continue to prefer thematic equities exposed to the key long-term drivers of economies such as healthcare, nutrition, technology and infrastructure.
Whether or not Brexit and the political stalemate is resolved anytime soon is unclear but we are keen not to expose our clients to binary outcomes especially those that can incur a capital loss.