No signs of the end… yet!
We have been closely observing the markets and focusing on the economic data throughout the year, which points to a global expansion, with no signs of slowing down. It’s an interesting time to enter the last month of the year, with Trump firmly in his presidency and the expectation of Brexit most certainly taking place. No one is yet sure of what is going on in North Korea, even though they conducted another missile test last night, the market seems to have passed this one by. The global economy continues to show positive signs of growth with sustainable momentum and we feel that it is time for us to dial back up our equity positions in the wake of this.
With our previous commentaries, you may have noticed that we have highlighted that equities have reached record highs and they continue to do so without any signs of a slowdown, and whilst this is true, we feel that we are able to turn up the oven and skew our portfolios more towards an equity mandate. If we look at the current position of where we are in the global economic cycle, earnings and expected earnings are healthy, given that the US grew by 3% in September on an annualised basis, bearing in mind that this could have missed expectations of 3.1% by the set back of the hurricanes. This solid growth has helped fuel growth in Asia, which is heavily dependant on the US Dollar and consumer confidence in the US. Yesterday we received data out of the US to further suggest that the strong consumer confidence remains buoyant working its way into the year end. This further adds to our conviction that the year could end on a high. The same could be said for European equities which are also heading upwards with earnings and expected earnings data, stronger than expected. We remain directionally invested in the bloc.
Whilst valuations are high, investors remain relatively cautious of the equity rally and this is true of our new positions too. Despite adding higher weights in our directional equity exposure, we are adding two new multi asset funds which fall into the 20-60% equity universe and are multi asset funds, meaning the fund manager will be able to skew between this equity range, as well as hold non-equity positions which will diversify our portfolios better as we enter 2018, as central bankers are expected to increase rates following high inflation.
Asset Rotation within the OBI Portfolios
Having highlighted that we are adopting a more normalised approach from the defensive approach we adopted in June, we will be increasing our exposure to Europe, Asia and Emerging Markets (EM). In Europe, the PMI data we have been assessing is improving and showing strong gains throughout the bloc. The Euro remains relatively strong which will substantiate our asset allocation.
With our strong conviction in Asia, the Asian economy has been prospering whilst the US has been reaching record highs, however the key is the US Dollar weakness which has been priced into the markets ever since Trump has struggled to make a big mark his presidency. The Spot Dollar (DXY charted above) reached around 103.5 running up to the US elections (first arrow) and Trump winning the election, but started edging lower and lower till mid-September (second arrow) when everyone was questioning his success and how he would pass his fiscal stimulus program through congress. Since then the US Dollar has been a little higher and currently trading at 93.11. The reason why we focus on currency is that it shows the underlining resilience and strength of the country in question. Whilst the US Dollar remains relatively cheap, countries that are dependent on the USD, such as Asia in this scenario can trade at a cheaper price in exchange terms and buy more from a Purchasing Power Parity (PPP) perspective. For this reason, we have seen Asian equities do well and have increased our exposure in this bloc. The same can be said for our EM exposure which has a high allocation to Latin America (LatAm). As the US Dollar is commonly referred to the global currency, as it has depreciated in recent times, other markets that trade on an exchange to it, have been prospering. We will keep an eye on the US and DXY to see how long the currency remains cheap.
The changes we have implemented in our Q4 rebalance are detailed below:
OBI Active 3 – Equity 10% to 18% (increase of 8%) – Normal 20% Equity – Outcome 4%
– Non-Equity 90% to 82% (decrease of 8%)
OBI Active 4 – Equity 20% to 25% (increase of 5%) – Normal 30% Equity – Outcome 5%
– Non-Equity 80% to 75% (decrease of 5%)
OBI Active 5 – Equity 30% to 40% (increase of 10%) – Normal 45% Equity – Outcome 6%
– Non-Equity 70% to 60% (decrease of 10%)
OBI Active 6 – Equity 42% to 50% (increase of 8%) – Normal 55% Equity – Outcome 7%
– Non-Equity 58% to 50% (decrease of 5%)
OBI Active 7 – Equity 50% to 60% (increase of 10%) – Normal 65% Equity – Outcome 8%
– Non-Equity 50% to 40% (decrease of 10%)
OBI Active 8 – Equity 60% to 70% (increase of 10%) – Normal 75% Equity – Outcome 9%
– Non-Equity 40% to 30% (decrease of 10%)
OBI Active 9 – Equity 70% to 80% (increase of 10%) – Normal 90% Equity – Outcome 10%
– Non-Equity 30% to 20% (decrease of 10%)
Given that we have been writing about the global equity rally in the past weeks, we have closely examined the economic cycle and are prepared to dial up our equity exposure, with the stance of remaining relatively cautious and still just below the “Normal” equity levels which we’ve had in the past.
Please also note that we have removed our exposure to Infrastructure as the fund manager has recently changed his mandate and has invested in property shares and therefore what was a benign plodder has become anything but as a position and we have therefore removed it. We have also removed the 7IM position as it is not available on some platforms and on SEI and as we are moving to SEI with all assets this is something we need to do to create harmonisation in models.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track improve marginally. Its apparent that the equity rally is still going strong with most of the gains being made in the US and Europe. The Chinese index, the CSI 300 has had its worst performance and has dropped following the tightening regulation in the finance industry. With our portfolios, they have seen the gains in the equity markets, however once the full rebalance is completed by next week Tuesday, we will be able to see the portfolios more in line with the equity markets.
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
You may have heard of the famous Chimpanzee, Enos. He was the second chimpanzee launched into space by NASA and the first to have successfully orbited the earth on this day in 1961. Enos was brought from the Miami Rare Bird Farm on April 3, 1960. He completed more than 1,250 training hours at the University of Kentucky and Holloman Air Force Base. Training was more intense for him than for his predecessor Ham, because Enos was exposed to weightlessness and higher gravitational forces for longer periods of time. His training included psychomotor instruction and aircraft flights. Enos was selected for flight only three days before launch!
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager