Data continued to weigh in on investor sentiment in the UK, as the UK economy struggles to find any momentum amid political uncertainty and deteriorating global growth. Same old story though as far as the market commentary goes though and no different to the weekly scribe for the last 6 months, yet the markets have as yet not fallen with the conviction we were witnessing in Q4 2018. As we always state though “we follow data not markets” and that is because markets or more importantly the private investors creating the liquidity and therefore the market, do not necessarily follow or believe the data at this stage of the cycle and they convince themselves the data is wrong and human behaviour looks at the world positively despite all evidence suggesting otherwise. This was last written about by me in 2008 and then we called it “Lemming Syndrome“ and the evidence is there today to state that no one has learnt anything, and all the same human behaviour mistakes are happening again.
Lemming Syndrome is from our perspective the stage in the economic cycle when the investors run of a cliff with blind faith that they will be okay because it is what the herd is doing, and they believe the herd must be right. What happens though is that eventually the lemmings start to lose momentum and run out of belief all is okay, they start to look around and question the logic of their pursuit. As they do the momentum wanes the herd collapses and the rest as they say is history as it is too late and the market falls, and all floors collapse. Remember human behaviour is such in that, if the market falls 10% investors will convince themselves it will be okay, then 20% down and although nerves high and losses severe with risks increasing, clients cannot do anything as it is too late and they do not want to realise the losses so inertia steps in. At 30% down with bad data and everything looking very bad and personal income becoming the focus coupled with debt coverage, clients start to get pressure from many sources and eventually lose their nerve and cash in to get cash to pay off loans, provide income and ultimately realise losses at the very point they should be buying stock. This is what happened in 2001 and 2008 to the lemmings and I am not going to let it happen in 2019 to our clients.
One of my clients asked me last week why I was relaxed, and my answer is simple. I am relaxed (not happy though) because irrespective of what happens with the trade wars, Trump’s tweets, the Fed Reserve, Brexit and the Middle East, unless something happens that is just outside the scope of anything that has happened before, I can sleep peacefully at night along with my clients, safe in the knowledge that the £500m plus that is entrusted to us is still worth £500m when we wake up. Overall, we are frustrated that we have not participated in this 6-month rally, but the market has risen on blind faith and optimism from the lows in December, with no rationale or sensibility as regards to the valuations. Markets are at 17 x earnings valuation in the US with earnings collapsing in the US, not rising and nothing about the valuations makes sense. We are therefore still confident that our core thesis will come to fruition in Q3 and we will hopefully start to see corporate earnings and therefore the market follow the data down and that will create a collapse in global equity valuations and opportunities into Q4, to reinvest and seize on long term opportunities as valuations become cheap again. It will all be okay, and we are confident that the short term under performance will be reversed as benchmarks collapse and we will benefit as the lemmings all continue to jump off a cliff and then panic eventually and die as they always do. (PS I know lemmings and the cliff jump is a misconception before anyone tells me) https://en.wikipedia.org/wiki/Lemming
We are confident that the market will eventually follow the data and it continues to get weaker globally and this is the same as what happened in 2008 and 2001 and we will remain defensive until the data tells us that it is either bottoming or turns positive.
For further information on key economic themes over the first half of 2019 and our expectations for Q3, please see the attached current positioning document.
Key events this week:
• Thursday- UK Retail Sales & Fed Williams Speech
• Friday- US Michigan Consumer Sentiment Preliminary
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document attached and the Market Update for July also attached.
Model Portfolios & Indices
Over the week, global equity markets gained on the back of increasing expectation of a potential rate cut in July of 0.25%, following Chairman Powell’s speech to Congress. While we wait for the outcome of US interest rates in the coming weeks and expect Q2 corporate earnings to decline, bond markets remain attractive for investors, as risk-off sentiment continues to spread within financial markets. It is clear that geopolitical tensions remain, and as economic data continues to illustrate weakness in the global economy, with risks now tilted towards the downside. As the OBI portfolios remain defensively positioned with limited equity exposure, our portfolios gained over the week, with the defensive barbell within portfolios performing well following the positioning changes made in May.
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, recent performance shows how quickly this can be reversed given current levels of risk and uncertainty.
Overall, it is our view that markets will continue to fall over the coming months before adjusting to the new norm based on lower global growth and weaker corporate profitability. 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. As shown in recent weeks, the capital preservation strategy is designed to remain flat when equity markets display volatility, with a defensive tilt which means that when markets do decline, the portfolios are well positioned to benefit. Markets are behaving irrationally, therefore the most sensible strategy is a defensive one given current market conditions.
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 1964, British speed pioneer Sir Donald Campbell set a new land speed world record of 403.10 mph in his car, Bluebird. In July 2014, to coincide with the 50th anniversary of the achievement, unseen family video footage of Donald Campbell breaking both the land and water speed records in 1964 was restored.
PS Gina is currently on Holiday in Malta enjoying herself so I would like to thank everyone in her absence for making sure the attached documents are al competed to support the MC. S always it is team effort and although we miss our IM we can cope without her for a short period of time. VBW and have a great week and let’s hope earnings continue to surprise on the downside and the lemmings continue to migrate with the herd!!!!!
Jason
