Over the past week, equity markets experienced a sharp decline on the back of renewed US-China trade tensions alongside negative economic data from the Eurozone and weaker corporate earnings data. As a result, as we await developments in the ongoing US-China trade saga, it is clear that investor sentiment is beginning to wane towards the downside, as the prolonged and relatively unsupported equity rally begins to falter. Investor complacency in recent months over key economic data and optimism over trade talks appear to be behind this fragility in investor sentiment, with this week’s US- China trade developments providing a pivotal point for investors to re-examine the risks in equity markets when compared with return potential.
For more information on the recent escalation of US-China trade tensions, please see the attached market update document.
It is no secret that equity valuations are stretched given the recent corporate earnings data and in the context of the current economic backdrop, however investors have been hanging onto equities as equity markets made unprecedented and economically unsupported gains. As we enter May however, we approach a potential turning point, with the recent resurgence of US-China trade concerns potentially providing a catalyst for investors to ‘sell in May and go away’.
While the ‘sell in May and go away’ adage has never been proven as a viable investment strategy (despite numerous academic studies on the subject), the theory that equities typically perform better between November and April always remains in the back of investors’ minds when approaching periods of uncertainty around this time of year, particularly given the tendency of the media to use the phrase when markets experience intra-day declines. If an investor were to follow this strategy, they would sell equities in May and invest again in November. Whether it is the renewed trade concerns, a worsening of the economic data, or weaker corporate earnings results which provide as the catalyst, given the current level of uncertainty in the global economy following a strong performance in equities over the first months of the year, selling in May could become a self-fulfilling prophecy.
As we await further data to confirm our expectations on the market outlook for the remainder of the year, we will watch developments over the coming weeks closely, paying close attention to US-China trade tensions and forward corporate earnings expectations. In the meantime, we remain content in our defensive positioning given the continued risks in equity markets.
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. This week’s performance highlights the ability of the portfolio 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, we are in line with 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.
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 1945, WWII ended in Europe after Germany signed an unconditional surrender. This event is marked by Victory in Europe Day, more commonly known as V-E Day.
Gina & Jason
Model Portfolio Investment Manager
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner Chartered Wealth Manager
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