Following on from our last weeks commentary, the US has been growing at a very strong and fast pace, which is now leaving a trail of doubts and worries. As we published last week, the S&P 500 has set a new record, leaving the longest bull run behind without a fall of 20% or more. However, the main question as always is, how long will this run last? Things that have resulted to this bull run are the corporate tax cuts and strong performance from oil and banking stocks which have helped buoyed the market in 2018. Although the markets have been moving to new highs, they do feel a bit tired, this whole economic cycle has now lasted 110 months when historically the average is roughly around 48, so were really in the gasp territory.
Yes, we are worried, and so are all the other market participants and economists out there, however we shall not make a hesitant decision as the markets have reached this elevated level for a reason. The strong growth is brought forward form strong fundamentals and as long as the economics and the core economic data remains strong, we will remain strong and completely invested. When we look at the technical indicators as well as the barometers in the attached economics document, all the indicators are currently high and are all pointing towards signs of the global economy heating up. The relative strength index (RSI) is usually a good technical indicator used in the analysis of financial markets and it is intended to chart the current and historical strength or weakness of a stock market based on the closing price of a recent trading day. We usually have an upper and lower bound and by looking at this, it shows that we are edging into the upper bound further and further as we progress through this bull cycle. the indicators and barometers we look at do therefore suggest that we should be seeing a recession in the next 12-18 months.
A good indication of this heating up phase was further proven in today’s US GDP data which shows that the US continues to strengthen. The second quarter GDP figure is up 4.2% when economists forecast 4%. This just continues to show that the US economy is roaring away with growth stronger than ever and from a replication perspective, this growth will feed into the rest of the world. The robust growth in the second quarter is unlikely to be sustained given the one-off drivers such as a $1.5 trillion tax cut package, which provided a surprise to consumer spending after a lacklustre first quarter.
Are the risks to the global economy growing?
Despite the recent highs on the US stock market, the risks are growing in the global economy. Like we have reported in our previous commentaries, its not so much about the politics, however if we just focus on the economics, the markets would be strong and up all the way! However, the rising trade barriers, which could slow growth across the board and ongoing risks of the end of the cycle continue to feed into the markets and cause volatility.
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 a bear market territory. The bull market again continues to spook investors and investors sentiment when it comes to market positioning and timing. Emerging markets are also an issue with the rising of the US Dollar, some of which has seen currency slumps as a result from an exchange perspective. It is also important to note that most emerging economies also hold large amounts of US dollar denominated debt, and as the dollar gets stronger, their repayment costs go up from a parity perspective, simple economics!
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 form todays 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.
We have input our new asset allocation today across all the model portfolios and have removed the following funds:
1. JP Morgan Global Macro Opportunities
2. Liontrust Monthly Income
3. Old Mutual Strategic Absolute Return Bond R Hedged
4. Kames High Yield
5. GAM Star Credit Opportunities
6. Carmignac Emerging Discovery W Acc (NON-hedged)
By removing the above funds, we are focusing the asset allocation to the current macro cycle and with the unique nature of cyclically rotating assets, we are able to maintain our investment strategy which is to focus on returning to our clients their predetermined annualised return with the focus on capital preservation when the markets do see a slowdown. The funds have been specifically removed as they have not been performing over the year. The below chart shows the year-to-date (YTD) performance of the funds and we have charted this against the FTSE 100 and UK Gilts to show the lacklustre performance of the markets as we reach this late cycle phase of the economic cycle. We will remain fully invested in our other assets as they are performing better in line with the financial markets.
Consequently, we have increased our exposure in the multi asset space, both in the cautious and balanced parts of the portfolios as this will give us the ability to have a remain fully invested into the markets and employ the fund managers to look at the markets and determine the best assets they should rotate within the given mandate. These funds will add to the equity and non-equity split and give the portfolios a higher flexibility mandate which is in line with out investment thesis.
Investment Committee Meeting
We will be holding our Investment Committee Meeting on Wednesday 12th of September 2018 and as a result will sending out the Market Commentary on Tuesday 11th of September.
In this meeting, we will conduct a top-down analysis on the global economy and the economic data. We continue to remain invested as the data and fundamentals suggest that we shouldn’t be worried about an imminent correction. The Investment Committee Meeting will therefore help us determine the current state and where we are in the economic cycle and help identify when we should start thinking about our model portfolios and adjusting our strategies, skewing them towards a more defensive mandate or remain at a more cautious yet normal phase.
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 increase, with again most of the gains being made in the US which has given growth to the rest of the world. The gains from the US have shown in Asia and Europe. The markets have done reasonably well over the past week based on the US-China trade tensions softening slightly. Asia’s main stock markets have rallied this week, based
on the S&P 500 and the Nasdaq hitting record highs. Markets opened strongly after the US and Mexico agreed to revamp Nafta, the North American Free Trade Agreement, in what Donald Trump called a “really good deal” for both countries. Europe again continues to look strong and this is all replicated into the markets through the PMI data we have been receiving and will receive from the first of next month.
The model portfolios have all been modestly rising in line with the changes in the indices based on the equity and non-equity split. The non-equity element of the portfolios acting as a hedge to the volatility we are currently seeing in the financial markets. by rotating the assets out, we will be able to report next week on the new asset allocation and performance given the current economic climate.
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 1831, English chemist and autodidact Michael Faraday publically demonstrates his discovery of electromagnetism, or as he called it, a ‘wave of electricity,’ via electromagnetic induction. His discovery of this energy transmission basically started of the electrical revolution.
As always have a wonderful week and stay safe.