Market Commentary – 12th Sept 2018

It’s all about the cycle and trying to avoid the roller coaster!

 

Rather than give the usual economic update I thought it would be prudent to inform you of our positioning and to try and explain what is going on from where we sit with portfolios and assets generally, especially as returns are underwhelming. There is no doubt that we are, as we have been saying, at the end of the party as far as the economic cycle goes and we are currently in what we refer to “scarcity of returns phase” (see chart below) and about to enter (by year end) capital preservation phase. The global cycle (see chart to left below) goes through four distinct phases and it is an ongoing roller coaster which is directly linked to the fortunes of investors and the pace at which we transition speeds up and slows down as it progresses. We as advisers taking those investment decisions on behalf of our clients and we are always faced with a complex combination of analysis and interpretation and we look at quantifying the different stages in the cycle. Some of us cyclically rotate our portfolios and other just go long hold and ride the roller coaster.

 

From our perspective we want to take the most risk for clients towards the end of the capital preservation phase (which will be when the markets are looking very bad and losses quite significant on the indices) because that is when from our perspective the risk will be rewarded and the least risk as we go through scarcity of growth . Today we have reduced risks but still have participation and as we enter capital preservation we will try and take even less risk.  The key is to reduce equity, reduce risk and lock in gains and then take risk when we feel the economic cycle will reward us by cyclically adjusting the asset allocation so we rotate between low risk high quality and high quality low risk assets, and that is not easy. Today we are getting increasingly towards the point as noted in the two charts below where the equity markets are going to capitulate and we are rotating into low risk high quality assets and using fund managers that have the ability to diversify their portfolios but it does not mean there is no risk.

What are we seeing and what does it mean?

 

We are at the point when the variation in returns between high risk and low risk assets is nil which means that risk is not being rewarded neither is being defensive which means nothing is being rewarded bar the riskiest assets. (chart to left) We are also at the point when the amount of stocks supporting the market in that they are trading above their 200 day moving average is also getting to lows and it is only the defensive US equities and US Tech stocks that are holding up the market. (chart in middle). What this means is that the optimism and growth in US assets is shrouding the truth for the rest of the world in that the pullback has already started and the highs seen in January for all but the US market reflect the fact that the peak on global growth has already happened and we are looking towards the end of the cycle. There is no doubt that Growth in the US this year has been fantastic and no one here says that is going to cease immediately but it is true that there are less constituents holding up the market than there was at the end of 2017 and we are close to the end of the cycle, globally.

 

 

 

 

US data is still strong though and data sets are supportive of us not yet falling into the capital preservation phase. We are though nervous and will be looking over the coming months to gradually take more risk off the table and progressively move into capital preservation phase. The reason why we do this is we see significant threats to capital and want to take the threat away and create an opportunity to preserve capital and reinvest as we progress through the cycle when assets look cheap and the equation of upside potential and downside risk looks better adjusted. The reason why the above is relevant and I thought intuitive is that we are today holding our investment committee meeting, and in this meeting, we will conduct a top-down analysis on the global economy and the global economic data and the charts above form part of our analysis. We today continue to remain invested with fund managers that have the ability to diversify risk and be defensive as well as those that do not, wit the theme of having a balance, as the data and fundamentals suggest that we shouldn’t be worried about an imminent correction in the coming weeks, but we need to watch the data very closely. The risks are high and the Investment Committee Meeting will set the groundwork to ensure by year end the portfolios have as much defensive positions as we can take so we give the fund managers the greatest amount of flexibility to adjust as the environment changes.

 

For anyone who wants further economic data 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 fall with the continued fears over the trade wars concerns. China is having the worst fall and Asia markets fall further when the markets closed this morning, following news that China plans on asking the World Trade Organisation (WTO) for permission to impose more than $7bn in sanctions against the US. This move has further spooked investors and business which are already worried about a possible escalation in the trade war between the world’s two largest economies. It is argued in the markets that China will be the cause of the next financial crisis. China is a great source of global growth and it is an absolute economic miracle over how the country is providing so much positivity into the markets.

 

With our model portfolios, with the way they are designed and the unique nature of adapting a fund of funds, we can manipulate the asset allocation to the way we need it to be by cyclically adjusting the model portfolios based on the economic cycle. Therefore, the fall in the portfolios is correlated to the drop-in performance, however we are able to limit the downside by protecting the assets with the capital preservation mandate we have adopted. The drop is only based on the current market risks, however as the strong economic data continues to feed itself into the markets, we could see markets edging higher and higher. High market risks have led investors towards safer assets, such as the Japanese Yen and US Government Bonds. We remain invested with our current asset allocation as we still see some upside in the markets from our research and the evidence in the numbers. It is absolutely certain for us to keep a close eye on the markets, as this will be the point when we will need to alter the asset allocation and the types of assets we hold to ensure we are protecting clients’ capital, as well as finding opportunities in the market to reach the targeted annualised returns for each model portfolio.

 

 

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 day’s 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 1940, Marcel Ravidat, finds a narrow entrance into a series of caves beneath the fields of Dordogne, France, and comes back with three friends to explore the subterranean world. The Lascaux cave was found! They gaze upon the vivid Lascaux cave paintings that experts will later date to over 17,000 years old.

 

As always have a wonderful week and stay safe.

 

Jason