OCM Commentaries

Market Commentary – 05th September 2018

By September 5, 2018 September 14th, 2018 No Comments

Why have the markets been volatile this week?

 

I think the main theme to focus on this week’s commentary is to report that the global economy is doing
just fine, despite the jitters on the political and economic face, which is very normal, and to a certain
extent, healthy! As we have started a new month, we have been receiving global economic data for the
month of August and the Purchaser Manager Index (PMI) data, which is a key indicator on reporting on
the overall health of a specific sector, is still strong. Yes, some data may have fallen from pervious highs,
however they are all reporting growth, and as an optimist, that’s a great thing! Yes, we are nearing the
end of the party, however the party is still on! We will remain invested and will keep an eye out on the
end of the cycle which isn’t anticipated to be in 2018.

One key theme we would like to report on this week’s market commentary is surrounding emerging
markets and the fact of the matter that Argentina and Turkey are heading towards an economic crisis.
The International Monetary Fund (IMF) is expected to rush through a bailout of Argentina sometime this
week of $50bn. We are currently seeing quite an interesting divergence in the markets, where we’ve
had record highs and a long bull market for the US, whereas in the emerging markets, we are now seen
to be in the bear market territory. The bull market again continues to spook investors and investors
sentiment when it comes to market positioning and timing. We came out of EM investments entirely in
our last rebalance based on the risks being high with oil prices, the trade wars and the fact that the US
Dollar continued to strengthen. Many EM markets hold large volumes of debt in US denominated assets
and with the strength of the US Dollar rising, the debt levels are becoming harder for EM markets
balance sheets to pay off. Turkey and Argentina are also another reason why investors are exiting this
space as their currencies fall.

 

There are indications that the global economic outlook is slowing when compared to this time last year,
Fed reserve policy makers are concerned about the prolonged trade tensions. Powell suggested that
these concerns could weaken the US economic outlook, this has therefore represented a risk for the
Dollar for the rest of the year until we see the Fed increase the interest rate. Following from last week’s
GDP growth data, the US does continue to look strong and we can maintain this view that this year, at
least, we are still happy with the macro climate and will probably start to reduce our equity exposure
towards the end of the year.

 

Are global central bankers rising interest rates too quick?

When we look globally, we first look at the US and how they are performing. As the US economy
continues to roar away and fires on all cylinders, the global economy is argued to be in rude health
backed up by solid growth figures and resilient core fundamentals. This probably explains why the
economy is unphased by various global issues, rate hikes, tariffs, Turkey, you name it and the economy
remains higher and higher each week and the economy had a surprising growth of 4.2% annual rate in
the second quarter and looks set for a similar pace in Q3. This could mean that the economy should
continue to feed its growth to the rest of the world, even though it may appear that the rest of the
world is more cautious and struggling.

Strong economic data and strong consumer confidence in the US has led to high spending, which means
that these are signs of the economy heating up. We are at a juncture where inflation needs to be
normalised with central bankers setting their expectations for normalising monetary and fiscal policy
which are demand side policies to ensure that the global economy stays in equilibrium, on the
overheating side of the equation. Usually, central bankers like to follow a same trajectory by rising and
cutting interest rates, but this cycle is very different as the US, Europe and the UK are all in different
positions in the cycle and the central bankers all seem to be dealing with separate issues. The Bank of
England is very keen to follow the lead of the Federal Reserve and may have to do that to keep sterling
strong, and that is a very big problem, as we may not be ready for higher interest rates without even
knowing what Brexit means.

Market makers and critiques of the current economics suggest that the raising of global interest rates by
the Fed has caused mayhem round the world, in emerging markets, such as Argentina and Turkey, and
we know these crises move from the periphery to the core, that’s what happened in the past, and if the
Bank of England follows in the path of the Fed then I think it will be really worrying because of the level
of total global debt.

For anyone who wants further data to substantiate the position please review the attached Global
Economic News Document.

 

Model Portfolios & Indices

Over the last week we have seen most of the indices that we track fall. The only index in the positive
territory is the technology heavily focused NASDAQ which is up slightly
Important Information
The data above will not directly correlate to the indices as there is always a delay in pricing because the US
markets close significantly later than the European markets and the Asian markets. The data set above reflects
the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays.
You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price
or value and you may get back less than the amount originally invested. Past performance is not a guarantee of
future performance. Performance figures quoted include the fund manager charges but exclude other fees such
as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed
and accrued, income is reinvested into the portfolio.

 

This Day in History

On this day in 1991, Nelson Mandela was chosen as president of the African National Congress. Often
referred to as the father of the nation by South Africans, Nelson Mandela was an anti- apartheid activist
and politician who served 27 years in prison. After being freed in 1990 he became the President of the
African National Congress (1991-97) before being elected the first black President of his country in a
fully multiracial election in 1994. For his activism, he received over 250 honours, including the 1993
Nobel Peace Prize, the US Presidential Medal of Freedom and the Soviet Order of Lenin.
As always have a wonderful week and stay safe.

VBW

 

Jason

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