Over the week, risk-off sentiment spread across global financial markets, as investors began to digest the probability of a drawn out US-China trade war and weigh up the increasing risks in equity markets. As the trade rhetoric from each side intensified, and political risks in Europe re-emerged, credit markets were the key focus this week, as trade fears sparked a move from equities to bonds, reflecting an increase in bearish sentiment.
For further detail on the recent European elections and key risks in Europe going forward, please see the attached market update.
Bond markets have rallied this month mainly as a result of the intensification of trade fears, with the 10-year Treasury yield dropping by around 30 basis points since 30th April (bond yields move in the opposite direction to bond prices). It now trades at 2.23%, its lowest level since September 2017.
The growing wall of worry has boosted appetite for safe haven assets, as investors seek safe harbour given uncertainties over trade and economic weakness. As recession concerns increase, key economic indicators are beginning to signal that choppy waters are ahead. This week, the 3-month US Treasury bill yield pushed above the 10-year Treasury bond yield, leaving their spread at the deepest negative level since August 2007. A persistent and deep inversion has preceded the last nine economic downturns since 1955.
With investor sentiment beginning to change, our expectations are that equity markets will continue to decline over the next few weeks on the back of increasingly negative economic data, trade tensions and continued political uncertainty. Given this outlook, the portfolios are well positioned to benefit from the continued uncertainty, with bond exposure within the portfolio gaining from the recent flight to safety, and with the inverse equity exposure gaining as a result of the sell off from equity markets. As it stands we remain confident in the current positioning, with portfolios being protected from a high level of volatility in equity markets.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the week, global equity markets declined as a result of US-China trade tensions and weaker European data. 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 while the benchmarks declined. The recent performance of the OBI portfolios against the benchmarks highlights the ability of the portfolios to quickly regain ground during periods of uncertainty. Over the month view, the portfolios outperformed the benchmark, and over the 3-month view, performance is beginning to converge. This illustrates 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 over the first quarter of the year has no foundation and will fall back over the coming months, with a sell off in equity markets before adjusting to the new norm based on lower global growth and weaker corporate profitability. 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.
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 1954, British runner Diane Leather became the first woman to run the mile in under 5 minutes; 4:59.6 at Alexander Sports Ground in Birmingham, England.
Gina & Jason