During one-month
period to 31st December 2019, major equity markets registered strong gains. The FTSE ALL-World Index rose
by 2.18% over the period, up by 23.9% since the beginning of the year. The VIX
index fell by 1.45% to end the period at 12.26, a rather complacent level by
historic standards. Most fixed interest
products continued to fall, in price terms, during the month. Sterling strength
and Yen weakness were the main currency moves, while the Chinese
Renminbi stayed reasonably stable versus the US dollar as phase 1 of the
trade talks continued. Commodities displayed a mixed price performance overall.
The European Central Bank saw Christine
Lagarde,the new President, present at her first official meeting, and recent
economic indicators signalled a stabilisation, although growth is still very
anaemic. Political events have featured further signs of discontent in Germany
(coalition split?) and France (pension and other reforms), renewed Spanish coalition
concerns, and inevitable squabbling re the EU (ex-UK?) Budget.
US market
watchers saw some progress with Phase 1 Chinese tariff negotiations, while
certain European barriers were introduced! Federal Budget concerns, Iranian
sanctions, Venezuela, North Korean tensions and Trumps personal issues (impeachment?)
were still very much in the news as the 2020 election draws closer. US economic
data still indicates a solid consumer trend although relatively buoyant first
quarter GDP growth figures did include a large element of inventory building
and more recent official figures have been mixed. Corporate results/forward
looking statements have taken on a more cautious tone, especially related to
tariff developments (actual or rumoured). Official interest rates have been
reduced three times to a range of 1.5% to 1.75%, much as expected, and a pause
was indicated by Fed Chairman Powell at recent meetings
In the Far East, China /US trade talks
dominated the headlines, while official and anecdotal evidence point to a
steadily weakening economy. Recent data releases pointed to 6.0% quarterly GDP growth
with risks growing to the downside, although the move on 2nd January
2020 showed signs of continued financial support/concern. Hong Kong remains still
very volatile. Japanese annual economic
growth was downgraded slightly to 0.8%, mainly on a weaker trade performance,
although 3rd quarter GDP, recently released, surprised to the
upside. The recent Upper House election result confirmed the LDP current strong
position while at the Bank of Japan meeting, the current easier fiscal stance
was reconfirmed, although the scheduled October 1st VAT increase was
applied.
The UK continued to report somewhat mixed
economic data with stable developments
on the labour front but poor corporate
investment , volatile retail sales, inflation as expected, weak relative GDP figures
and poor property sentiment, both residential (especially London) and commercial (especially retail).Figures
announced on 30th November by
the CBI show historic and prospective output falling by about 10%.Business and
market attention, both domestic and international, is clearly focussed on
ongoing BREXIT process under new Prime Minster ,Boris Johnson, where at the
time of writing, the Withdrawal Bill has been passed, but the long process of
renegotiating new trade arrangements has yet to start. Both the Chancellor and
Bank of England Governor have made frequent references to the unsettling
effects of any unsatisfactory Brexit outcome, as have a growing number of
business leaders and independent academic bodies. Political factors aside,
economic and corporate figures will inevitably be distorted over coming months.
GDP growth of around 1% for full year 2019 looks likely, with a similar
projection for 2020.
Global Equities rose
by 2.18% over December, the FTSE ALL World Index showing a gain of 23.9% since
the year end. The UK broad and narrow market indices, both advanced by around 3%
over the monthly period, but lagged world equities in sterling adjusted terms
by about 6%, since the beginning of 2019. Along with the UK, Asia and Emerging
Markets outperformed during the month, but lagged over the twelve-month period,
while USA and Continental Europe showed above average gains for the year. The
VIX index fell, reflecting a greater risk-taking mood to a level of 12.26, and
down 51.77% since the beginning of the year.
A mixed
month for UK sectors with oil for example bouncing strongly in December but
amongst the lagging markets over the full year, while telecoms were some of the
weakest names in December. Over the full
year, industrial shares, pharmaceuticals and real estate showed the largest
gains all over 20%, while telcos, banks and oil companies were amongst the
relative losers.
Fixed Interest
Gilt prices fell over the month, the 10-year
UK yield standing at 0.73% currently. Other ten-year yields closed the month at US, 1.92%,
Japan, -0.02%, and Germany, -0.19%. Since June 2019, over $6 trillion of
government debt has moved back into positive yield territory. UK
corporate bond prices also fell slightly over the month, while more speculative
grades rose. Floating rate bonds rose while the favoured convertible bond was
redeemed, as expected, after showing a year to date return of about 10%. See my recommendations in preference shares,
convertibles, corporate bonds, floating rate bonds, speculative high yield etc.
A list of my top thirty income ideas (many yielding around 6%) from over 10
different asset classes is also available to subscribers.
Foreign Exchange
Sterling was again the main mover
amongst the major currencies during December largely on political news, while
the dollar weakened. Since the beginning of the year, sterling appreciated approximately
4% against both the US Dollar and the Euro. The dollar stayed reasonably stable
versus the Chinese Renminbi as tariff discussions continued. As ever, FX
decisions remain crucial in determining asset allocation strategy. As an
example, largely on the back of the December UK election result, sterling
adjusted FTSE outperformed the world index by about 3% in December.
Commodities
A mixed month for commodities on global
growth concerns and supply shocks. The oil price advanced, and gold also rose,
while coal and natural gas showed large price declines. Over the full year
Brent Oil showed a respectable gain of over 20% but the largest gain amongst
the major commodities was enjoyed by palladium up over 53%
Looking
Forward
Over the
coming quarter, geo-political events and Central Bank actions/statements meeting,
will continue to dominate news headlines and market sentiment, in my view.
Regarding corporate earnings/statements, it will be interesting to see if the recent
relief factors of US/China truce, UK election, European and Japanese
stabilisation, lead to a more optimistic tone. Calls for more fiscal response
on the part of governments opposed to limited Central Bank monetary fire power
will intensify, in some cases allied to environmental issues.
US
watchers will continue to speculate on the timing and number of further
interest rate moves during the 2020/2021 period while longer term Federal debt dynamics,
impeachment progress, election debate and trade war winners/losers (a moving
target) will increasingly affect sentiment. Corporate earnings growth will be
subject to even greater analysis, amidst a growing list of obstacles. In Japan market sentiment may be calmer
after recent political and economic events although international events e.g.
exchange rates and tariff developments, will affect equity direction. More
equity specific issues e.g share buy-backs,ETF developments, TOPIX constituent
changes, should also be monitored. There
is increasing speculation that China may announce more stimulative measures and
key $/Yuan exchange rate levels are being watched closely. European investment
mood will be tested by generally sluggish economic figures and an increasingly unstable
political backdrop, now encompassing France and Germany.
Hard economic
data (especially final GDP, corporate investment, exports) and various
sentiment/residential property indicators are expected to show that UK economic growth continues to be
lack-lustre and it is too early to see if any post-election euphoria feeds into
consumer sentiment. The election result has however had a more immediate effect
on certain utilities, infrastructure project plans etc. It is highly likely that near term quarterly figures
(economic and corporate) will be distorted (both ways), and general asset price
moves will be confused, in my view, by a mixture of currency development,
political machinations, international perception and interest rate expectations.
In terms of current recommendations,
Depending on
benchmark, and risk attitude, first considerations should be appropriate
cash/hedging stance and the degree of asset diversification (asset class,
individual investment and currency).
An increased weighting
in absolute return (but watch costs, underlying holdings and history very
carefully), alternative income and other vehicles may be warranted as equity/gilt
returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate,
including some outside sterling. Both
equity and fixed interest selection should be very focussed. Apart from global equity drivers e.g.
slowing economic and corporate growth, tariff wars and limited monetary
response levers, there are many localised events e.g. UK trade re-negotiation,
US elections, European political uncertainty,Asian poitical hotspots that
could upset many bourses, some still relatively close to recent record levels.
I have kept the UK at an overweight
position on valuation grounds despite the recent post-election relief bounce. Full
details are available in the recent quarterly review. However, extra due
diligence in stock/fund selection is strongly advised, due to ongoing
macro-economic and political uncertainty. Sterling volatility should also be
factored into the decision, making process.
Within
UK sectors, some of the traditionally defensive, and often high yielding
sectors such as utilities and telecoms may bounce against a more friendly
political backdrop. Many financials are also showing confidence by dividend
hikes and buy-backs etc. Oil and gas majors will be worth holding after the
flat 2019 performance, remembering that the larger cap names such as Royal
Dutch and BP will be better placed than some of the purer exploration plays in
the event of a softer oil price. Small
cap domestic stocks are currently receiving post-election support.
Continental
European equities are preferred to those of USA, for reasons of valuation, and
Central bank policy, although political developments and slowing economic
growth need to be monitored closely. I suggest moving the European exposure to
neutral from overweight after the 2019 outperformance. European investors may
be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully
and remember that certain European and Japanese companies provide US exposure,
without paying US prices. I have
recently written on Japan, and I would continue to overweight this market,
despite the 2017 and 2018 outperformance and 2019 underperformance relative to
world equities. Smaller cap/ domestic focussed funds may outperform broader
index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.FX will
play an increasing role in the Japanese equity decision.
Alternative
fixed interest vehicles, which continue to perform relatively well, in total
return terms, have attractions e.g. preference shares, convertibles, for
balanced, cautious accounts and energy/ emerging/speculative grade for higher risk e.g. EnQuest,Eros. These remain my favoured plays within the
fixed interest space. See recent note
UK
bank preference shares still look particularly attractive and could be
considered as alternatives to the ordinary shares in some cases. Bank balance
sheets are in much better shape and yields of 6%-7% are currently available on
related issues while a yield of 9.1% p.a., paid quarterly, is my favoured more
speculative idea.
Alternative
income and private equity names exhibited their defensive characteristics
during 2018 and are still favoured as part of a balanced portfolio. Reference
could also be made to the renewable funds (see my recent solar and wind power
recommendations) which continue to outperform in total return terms. Selected
infrastructure funds are also recommended for purchase especially now that the
political risk has been reduced somewhat. New issues in this area e.g. Aquila
and JPM are likely to move to larger premiums.
Any
new commitments to the commercial property sector should be more focussed on
direct equities and investment trusts than unit trusts (see my recent note
comparing open ended and closed ended funds), thus exploiting the discount and
double discount features respectively as well as having liquidity and trading
advantages. However, in general I would not overweight the sector, as along
with residential property, I expect further price stagnation especially in
London offices and retail developments e.g. (Hammerson, Intu). Subscribers may
read more on this subject in my latest quarterly review. One possible exception
to the sentiment above is the growing attractiveness of certain assets to
overseas buyers. The outlook for some
specialist sub sectors e.g. health (PHP equity and bond still strongly
recommended), logistics, student, multi-let etc and property outside
London/South-East, however, is currently more favourable. Investors should also
consider some continental European
property plays e.g SERE.
I
suggest a very selective approach to emerging equities and would continue to avoid
bonds. Although the overall valuation for emerging market equities is
relatively modest, there are large differences between individual countries. It
is worth noting that several emerging economies in both Asia and Latin America showed
first quarter 2019 GDP weakness even before the onset of any possible tariff
effects. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g.
Russia could yield rewards and there are signs of funds moving back to South
Africa on political change. Turkish assets seem likely to remain highly
volatile in the short term and much of South America is either in a crisis
mode e.g. Venezuela, Argentina or embarking
on new political era e.g. Mexico and Brazil (economic recovery?). As
highlighted in the quarterly, Chinese index weightings are expected to increase
quite significantly over coming years, and there are currently large inflows
into this area following the price weakness of 2018. One additional factor to
consider when benchmarking emerging markets is the large percentage now
attributable to technology. A longer-term index argument is also being made in
favour of Gulf States, although governance issues remain a concern.
Full quarter
report available to clients/subscribers and suggested portfolio
strategy/individual recommendations will be available soon. Ideas for a ten
stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous,
income), 30 stock income lists, defensive list, hedging ideas, and a list of shorter-term
low risk/ high risk ideas can also be purchased, as well as bespoke portfolio
construction/restructuring.
Feel
free to contact regarding
any investment project.
Good luck
with performance!
Ken Baksh
Bsc,Fellow (UK Society of Investment Professionals)
2nd January 2020