Preparing for a stormy second quarter
Over the week, equity markets shrugged off weaker economic data as the disconnect between market movements and economic fundamentals worsened. Once again, Brexit and US-China trade talks dominated the headlines this week, as MP’s emerged from a series of indicative votes no closer towards finding a solution to the Brexit stalemate, and US-China trade negotiations rumbled on with another series of meetings scheduled over this week. As a result, trade uncertainty continues to weigh on downside risks, and currency risks relating to Brexit persist for UK investors.
A number of key data releases served to increase market volatility over the week, however failed to weigh down global equity markets, with most of the global indices gaining ground, making up for last week’s declines. Concerns of recessionary risk abated as the week went on as a result of better than expected Chinese PMI data, which boosted optimism that the government’s stimulus measured had stemmed the steep slowdown in the influential Chinese economy. This came as economic data for the US (which was delayed as a result of the government slowdown earlier in the year), UK and Eurozone showed significantly weaker economic fundamentals as a result of lower global demand.
For more information on whether this week’s China data is significant, and if the equity rally will be sustained, please see the attached briefing note.
As we enter the second quarter of the year, we expect that market conditions will become more challenging, as weaker growth and trade tensions begin to feed through into corporate profitability and investment spending for Q1. As it stands, the S&P 500 is expected to report a 3.8% decline in earnings for Q1, representing a steep slowdown in corporate earnings from the double-digit positive growth experienced in previous quarters. Negative earnings surprises are likely to force investors to re-evaluate current equity market valuations, resulting in a steep decline in equity markets. Over the next two months, we will be closely watching markets as the corporate earnings season gathers momentum and US Q1 GDP is released, which should be a good indicator of the real health of the US economy.
Going into the second quarter, we remain confident in our current positioning, we continue to monitor market movements closely, and are poised to act should the economic data change. Over this quarter, we expect to gain greater clarity on the direction of markets via a resolution to key ongoing issues such as Brexit and US-China trade tensions, and greater insight into the extent of the impact of the global slowdown on the economy. Once we get further clarity, we are able to demonstrate a high level of agility given our current positioning, with high cash levels to redeploy into the necessary asset classes as the economic data and risks change.
In the meantime, portfolio performance remains relatively flat (as expected) due to the well- diversified asset allocation underpinning our defensive portfolio construction. In the unlikely case that economic conditions start to improve, markets typically experience three 5% pull backs each year, with significantly more during periods of high volatility. We are therefore confident that the market would give us an appropriate buy in point which would realign performance with the benchmark, leaving clients no worse off as a result of the strategy. In the meantime, downside risk has been limited by our defensive positioning, and we remain in a strong position going forward.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Following the defensive repositioning of portfolios in December, our OBI portfolios have a low equity allocation, with exposure predominantly coming from the FTSE 100 and S&P 500 shorts as well as the Odey Long/Short European fund. For this reason, the equity exposure within portfolios is inversely correlated to markets ahead of the expected decline this half. Overall, global indices gained over the week as a result of stronger Chinese manufacturing PMI data, regaining their losses from last week. Following a challenging week, the OBI portfolios remained relatively flat as a result of their defensive, well-diversified positioning.
Overall, while we know missing out on the gains in comparison to the benchmark is painful, we continue to see significant risks ahead in equity markets, with investor sentiment tilting towards the downside and risk off sentiment spreading as risks intensify. The economic data continues to support our expectation for a drop back in markets in H1, therefore we regard benchmark movements as irrelevant in the bigger picture and remain defensively positioned going forward. It takes time for the data to feed through structurally, therefore as we wait for the data to feed through into markets, we are expecting volatile market conditions to continue, however it is key to bear in mind that the scenario will take time to play out. We must view intra week market fluctuations in the context of longer-term market trends and stay content in the knowledge that portfolios are protected from the excessive risks in markets.
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 1973, the first mobile phone call was made in downtown Manhattan, NYC by Motorola employee Martin Cooper to the Bell Labs headquarters in New Jersey.
Have a great week, VBW
Gina & Jason
