Market Commentary – 27th September 2018

US Stronger, Safer and Richer?

 

We are at a very interesting juncture in the cycle where inflation is relatively high in a fast-growing economy which as we have commented on the past to be firing on all cylinders and Donald Trump has made it loud and clear that he is the reason for the US doing very well. He has mentioned that he has done more in his two years than almost any previous US president and has told the world that the US is stronger, richer and safer. This is partly true; however, the story is a lot bigger than just Trump. We have got into a period of strong US corporate earnings which is extending the bull run and strong demographics is also playing its factor in the story.

 

The US will hike today!

 

Today is the day the Federal Reserve is expected to rise the base rate by 25 basis points which will be the natural progression phase for the policy makers to control inflation, especially in an economy with the growth forecasts being higher.

 

Donald Trump has criticised rate rises by the US Fed, chaired by Jerome Powell and has made it loud and clear that he is “not happy” about the fact that the US Federal Reserve is raising interest rates, especially in a time where we are uncertain about the overall health of the global economy in the long term, given the assumption that demand sided policies, such as monetary policy are lagging stimulus packages. Jerome Powell was knowing to be relatively bullish on rising rates from his predecessor, Janet Yellen, hence the volatility in the markets when he was signed up. Mr Trump’s criticises but rates in the US needed to go up. Given the issues highlighted above over inflation, which is above target, and wages are rising the fundamental pressures are for rate rises to keep that constraint on the economy. Businesses are well equipped to cope with rising interest rates, although higher labour costs could squeeze profits going forward. Worker bargaining power has increased significantly due to the ever-tightening job market. In the UK, there are fewer pressures for rate raises, given the uncertainty over Brexit and how this will turn out.

 

Despite the strong resilience of the global economy, and the fact that we are aiming for over 4% global growth on an annualised basis, we do need to time the markets well to ensure that our Outcome Based Investing (OBI) mandate remains clear. By cyclically adjusting the model portfolios, we are able to adapt the asset strategy to the macroeconomic climate and focus the model portfolios more towards the underlying market conditions, and as well as protecting the portfolios from the downside. There may be plenty of geopolitical risks around at the moment, which we are closely watching as they are causing the nervousness in the markets and the present volatility, such as the uncertainty around Brexit and the Trade wars, so name a few. Despite this, the trade tensions with China continue to escalate, but have very little effect on the financial markets.

 

As the equity markets continue to roar away, especially in the US, we see them to strengthen on this path throughout 2018, into 2019 and a probable correction in 2020. It’s important to note that the private sector is what is driving the growth based on strong corporate earnings. If we focus on the barometers and an individual sector basis, when we look at the investment banking sector, the level of mergers and acquisitions (M&A) so far this year has risen to an all-time high, which is further justified in the global growth story. Globally there have been $3.2 trillion worth of M&A deals. This continues to strengthen as private corporations continue to do well and gear up for the next phase of the cycle. Usually, we would look at the state of the M&A picture when we feel we are late in the cycle, because companies have that confidence to make that final purchase, before the economic cycle turns which is again something we will closely watch to ensure we time the markets just right and shift to assets which perform well when equity markets fall.

 

For anyone who wants further data to substantiate the position 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 in the positive territory which further justifies the positioning of the model portfolios in which we hold high equity exposure. Again, if we look at it from a constituent basis, the indices that are soaring higher and higher is in the US and the stocks within these indices are the technology stocks which continue to surprise the upside, based on strong corporate earnings and boosted fundamentals, and a good barometer to see this tech rally is by looking at the NASDAQ which is highly compromised by technology stocks.

 

The model portfolios continue to grow within the mandate and the stocks carefully selected within this space are chosen on strong conviction. We will expect this asset allocation to remain the same as long as the economic data remains strong, however with the tilt more towards a multi asset strategy, we are able to dynamically position the model portfolios as the nervousness in the market continues to heighten. We are constantly speaking to the fund managers of the multi asset funds to ascertain their views on the markets and the industries they invest in. this will be a good gauge to note when the quantitative analytics points towards a slowdown, when they reduce the equity allocation and skew the funds more towards global bonds, which do well in a downturn.

 

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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 1960, US Vice President Richard Nixon meets Senator John Kennedy in a TV station for the first televised presidential debate in US history. The TV is now a political kingmaker (or even breaker)!

 

As always have a wonderful week and stay safe.

 

VBW

 

 

Jason