Investment Committee 02/12/2019

Seems like Groundhog Day, but sadly Tariffs and Brexit dominate and for the most part it’s causing noise for investors. However, what is certain is that over the medium to longer term the world is going to change, priorities and needs will adjust. Some things will however make a comeback, but social governance and climate change will be major themes for certain.

The classic 60/40 (equities and bonds) portfolio year to date has done well – which has made many clients optimistic about future returns. If you look at the last 10 years, 2018 has been the only year to have seen a large fall, typically over 10 years you would expect to have 2 or 3 bad years… As investors we must not get complacent and expect every year to be a successful one.

Valuations of companies for the world index on average are back to the mean. This tells us that we need to be more specific when it comes to stock picking, but we are still not in a bad position. That said, the US is firmly priced (overpriced) against its peers in the rest of the world.

One reason we believe we’ve had great excitement this year is because of central banks, who have made further cuts to interest rates. This easy gain is progressively over, the road is running out for this tool.

We still believe the biggest fear in the short term is world trade between the US and China. Global trade on the back of this has dropped, and we have started to see a real regime shift. If you compare the world suppliers from 2000 to 2019, we have seen a dramatic shift of the world choosing to be supplied by China versus the US, the 5G scandals in the UK with Huawei have been a great example of this.

If we focus on the US (currently the world’s leading economy) we know Trump needs a deal, Trump can’t afford for the US economy to be sluggish before his next election bid. 

Aside from trade wars we always can have scope for a surprise, one thing we do have is lots of debt, this could be the next global crisis… So, what are the possible recession triggers?

Key risks:

  • Climate Change
  • Interest Rate Spike
  • Chinese Debt Crisis
  • Central Bank Policy Error

We are now in a position where global debt is at its highest level in peacetime, it’s now surpassed the levels seen after WWI and only matched by the levels after WWII. At what point do people/governments and central banks think this is crazy? QE is just flowing into equity prices and not to the wider economy, its impact is wearing out…

From an asset allocation point of view, we continue to be fearful of bonds, value is still with equities and you must take the rough with the smooth. We have started to see a shift of funds out of bonds and back into equities, potentially a trend which we will continue to see more of in 2020. The UK is under exposed and Europe is now neutral (moving from negative), it’s likely to see this continue to improve.

Brexit, polls are looking at a conservative majority as being predicted. However, complacency in the polls is the biggest fear. BOE is prepared to be fast and loose with policy which is supportive.

In the world of currencies – if the dollar does fade, this is good news for emerging markets. We will see several big maturities in the world of debts in 2020, it’s helpful if the dollar fades at this time, as this makes these debts less of a burden and easy to replace. A strong dollar is bad news for the world economy.

In Japan, companies are starting to reform themselves. The best companies are trying to make a real change and become more competitive, without the need of government support. For stock pickers this creates a good opportunity.

Europe – There are still things to do in Europe to aid reform, but it’s a good stock picking zone. For lower risk portfolios, dividend stocks have been very out of favor as people have preferred tech stocks etc., so dividends moving forwards will become more important.

This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.

Please note past performance is not reliable indicator to future returns. 

Your investment may fall as well as rise and you may not get back what you put in.