OCM Commentaries

Market Commentary – 15th August 2018

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

What is going on in Turkey?

Overall it is becoming a bit of basket case and the fear is that he contagion and issue will spill over into
Europe, but we do not feel they will. The economy has been a very fast-growing economy; however,
it hasn’t really had sustainable growth which is able to hold the economy together. Like most countries
in this situation, there is too much debt and much of that debt is in hard currencies like US Dollars and
Euros, so when the currency weakens relative to the USD or the Euro, the debt spectrum stays the
same value and the price of paying the debt goes up. Turkish inflation is out of control, there are too
many imports and not enough exports. The leadership is also a massive topic of concern, which is the
main reason as to why the economy is in the state it is. With Turkey’s inflation at 15%, the central bank
must raise interest rates now. They must implement monetary policy as they need to slow the
economy down and to try to tackle the inflation problem, and raising interest rates the impact should
be to reduce domestic consumption.

The president is not exactly trusted by investors either and that
is not helping. Overall though although initially the issues caused turbulence the issues Turkey with a
volatile leadership party is very common behavior for Emerging Markets and is not untypical,
however it is a very toxic one and we’re seeing the impact of that recently. It is expected that the
troubles in Turkey won’t snowball into a wider emerging markets crisis, such as the one that hit Asia
in the 1990s. Most other developing nations have much healthier fundamentals.

 

Currency traders have been aggressively selling the Turkish lira for months and after a few recent
defeats, it has slumped 45% year to date. Financial markets can be a great way to encourage
governments and companies to manage their affairs prudently. But they can also become selffulfilling.
The 2-year yield on Turkish debt was almost 22% up on Monday morning, while the 10-years
was up 20.6%. The central bank has tried to cushion the effects and ensure the nation’s financial
system doesn’t seize up by reducing the amount of lira reserves banks have to hold. We don’t hold
anything directly as regards to investments in Turkey, however in our Emerging Markets fund, the
total holding of the fund manager in this space is less than 1% of the total holding, which makes our
direct exposure to Turkey 0.01%. which is a positive.

 

How is the rest of the world (it’s still positive) …?

We have been getting very positive news throughout this month to further substantiate the reason as
to why we remain at our current position with the investment committee, and the decision to remainat a normalised approach and remain fully invested in the markets:

 

1. This morning we received data to show that the Eurozone economy grew at a faster than
expected rate.
2. UK Unemployment rate falls to the lowest levels since 1975 and has fallen to 4% between
April and June.
3. The German Economy is still in robust health and German GDP grew by 0.5% in the second
quarter being boosted by higher household and state spending. The European Union’s largest
economy was expected to expand by 0.4%. Despite all the prophecies of doom, the upswing
is not only alive, but kicking!
4. Most importantly is the health of the USA and we only have to turn to the USD

 

Is strong global growth likely to last?

I think the simple and straightforward answer is yes for the coming quartier but beyond that no,
however that being said, it is apparent that economic recessions are indeed inevitable based on the
assumption of booms leading to recessions. It’s without a doubt that this year has been one interesting
year so far with periods of uncertainty from both a political and economic face. We are currently in a
very strong phase of the global economic cycle, and most of the momentum is being led by the US.
Economists like to use the term that the US economy is firing on all cylinders and roaring away as
noted above which puts it into perfect context about how long they can keep going. This growth is
based on strong fundamentals and the health of the current global economics is very strong, however
is being let down by political factors. We are coming to the peak of the US rate cycle and stock markets
generally peak six months before so that being said we are getting very close to the end of the party
if we assume the US rate cycle peak is Mid 2019.

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 drop quite significantly especially
in Europe due to the political turmoil in Turkey. Investors sentiment is low at this current juncture,
however, it is more a short term issue as the topic has just fed into the markets with the US closing
last night positively and Europe opening on a positive note this morning. Like we continuously say in
our commentaries, if it wasn’t for the geo political issues, the economics and data would take the
markets higher! The core fundamentals are strong and all the economic data we have received this
month has proven that the economic data is positive.

With our model portfolios, with the way they are designed and the unique nature of adapting a fund
of funds, we are able to manipulate the asset allocation to the way we need it to be by cyclically
adjusting the model portfolios based on the economic cycle. Therefore, the fall in the portfolios is
correlated to the drop-in performance, however we are able to limit the downside by protecting the
assets with the capital preservation mandate we have adopted. The drop is only based on the current
market risks, however as the strong economic data continues to feed itself into the markets, we could
see markets edging higher and higher. The plunge in the Turkish Lira has scared market participants
and has lead investors towards safer assets, such as the Japanese Yen and US Government Bonds. We
remain invested with our current asset allocation as we still see some upside in the markets from our
research and the evidence in the numbers. It is absolutely certain for us to keep a close eye on the
markets, as this will be the point when we will need to alter the asset allocation and the types of assets
we hold to ensure we are protecting clients’ capital, as well as finding opportunities in the market to
reach the targeted annualised returns for each model portfolio.

 

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 2016, Usain Bolt wins 100m Olympic gold at Rio. This was the mark where the 1st man
won the Olympic event three consecutive times. Now that’s what you call consistency. As always have a wonderful week and stay safe.

 

VBW

 

Jason

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