Positioning to navigate the storm
Over the week, the effects of the recent escalation in US-China trade tensions flowed through into equity and credit markets, as equities declined and bond yields fell, reflecting a significantly weaker outlook for the global economy. As the week went on, investors considered the implications that a long, drawn out dispute would have on global growth and corporate earnings should there be no resolution in the near term. It is our view that this dispute could provide as a catalyst for a sell off in equity markets, as investors sell equities in favour of cash and safe haven assets given the excessive risks in the global economy.
For further detail on the risks and our outlook going forward, please see the attached market update and our Global Economic Overview
As we wait for clarity on the trade issue and weigh up the existing weakness in the global economy, we remain confident in our defensive positioning, with client assets being protected from high levels of volatility. As equity markets continue to decline on the trade uncertainty, the portfolios are well positioned to gain, with the downward tilt within the portfolios performing well due to the inverse relationship with equity markets.
As it now remains unclear as to how long this period of economic weakness will last, this week we are redeploying cash into strong, stable assets with uncorrelated and consistent returns, building on the core, long term holdings within the portfolios to provide a consistent source of returns regardless of market conditions. In line with this, we are adding traditional and non-traditional UK bricks and mortar property exposure as well as an actively managed corporate bond fund. The purpose of these assets are to provide consistent returns to the portfolios over the long term.
Overall, while the headlines and market movements appear unsettling, clients can remain calm in the knowledge that we are defensively positioned, with a tilt which gains when markets fall. As the data changes, we are poised to act on opportunities as they arise, however in the meantime the portfolios are well positioned with low equity exposure.
Model Portfolios & Indices
Over the week, global equity markets declined on the back of renewed US-China trade tensions, which resulted in a subsequent decline in the benchmarks due to their equity content. As the OBI portfolios remain defensively positioned with limited equity exposure and a downward tilt which benefits when markets decline, our portfolios were up over the week. The recent performance of the OBI portfolios against the benchmarks highlights the ability of the portfolios to quickly regain ground against the benchmark during periods of uncertainty, with the below chart showing performance over the month and the 3-month view. Over the month view, above the benchmark, and over the 3-month view, performance is beginning to converge. This shows that when equity markets do decline, the portfolio is well positioned to benefit.
As we progress from here, it is important to recognise that we should not let benchmark performance make us feel like we have missed out on anything, because although we have in the short term, this week shows how quickly this can be reversed given current levels of risk and uncertainty.
Overall, it is our view that the rally experienced so far this year has no foundation and will fall back over the coming months, at which point we will again start beating the benchmark and recover what has been lost either because the benchmark will capitulate fully or because sterling will appreciate and erode overseas asset values. The key point here is to take a long-term view, look at the current level of uncertainty in the global economy, and remember that the portfolio is designed to minimise your exposure to risk and preserve capital.
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 1957, Britain tested the first hydrogen bomb on the Christmas Island area in the Pacific Ocean as part of the British hydrogen bomb programme, culminating in the UK becoming the third recognised possessor of thermonuclear weapons.
Gina & Jason
