Investors celebrated over the week as two key market risks abated, with much needed certainty given on key issues which have weighed on markets since the beginning of the year: Brexit and US-China trade. As a result, with a phase one US-China trade deal agreed and the election of a business-friendly Conservative government with a significant majority, markets now appear to have built the momentum to carry us into the New Year. At the same time, we are starting to observe some bright spots in the economic data following what has been a challenging year for global trade and economic growth.
A changing landscape
As we prepared for a long night of Election result coverage in the UK on Thursday, it was announced that President Trump had agreed to a phase one trade deal with the Chinese, removing the threat of damaging tariff increases set to go ahead at the weekend. While this was originally anticipated, the removal of the threat of a re-escalation in trade tensions gave us the green light to pursue strategic equity opportunities as they arise. As a result, with the threat of new tariffs removed, after the UK Election delivered a substantial majority for the Conservatives and greater certainty to the Brexit outcome, we altered our portfolio positioning to benefit from UK small/mid-cap opportunities and alleviating global trade concerns.
With key risks abating, the last full working week of the year provides a final snapshot of the global economy after the 2019 slowdown. This gives us a chance to analyse the outlook for 2020, which is looking brighter after the US and China agreed on the first stage towards a trade deal, while the road to Brexit now appears somewhat clearer. While there remains little substance to the phase one trade deal (as highlighted in previous market commentaries), and with there still a long way ahead to the EU’s withdrawal from the EU, this was enough to push markets higher and provide upward momentum going into the final weeks of 2019, and could potentially bring about a some improvement in the economic fundamentals in Q1 of 2020.
Positioning going into 2020
Going into the final weeks of 2019, with the removal of these two key risks, it is our view that conditions are now supportive of a strategic return to certain areas of equity markets. As recent data releases remain relatively mixed, we are exercising caution, adding exposure to areas where we see opportunities to benefit from low valuations and supportive economic conditions.
As it stands, we still view large caps as extremely expensive relative to company fundamentals, and expect that as global growth remains subdued and with earnings data continuing to underwhelm in those companies with greater international trade exposure, we will see a rotation from large caps to small caps. Following the relative underperformance of these smaller, more domestically focused companies given prevailing risks, lack of fiscal stimulus and high levels of uncertainty in recent years, we are now seeing opportunities arise in this space, particularly in the UK.
In the New Year, we should obtain greater clarity on the direction of the global economy, with new data releases which should provide clarity over whether the bright spots we are currently observing are sustained and suggestive of an improvement in economic fundamentals. With the road ahead appearing somewhat clearer, we are optimistic on 2020 returns, with recent changes made to the portfolio positioning expected to initiate the return to normal portfolio return expectations, with the capital preservation mode now lifted. It is important to note that while we do see conditions improving for certain areas of the market, we will not be implementing the full equity content immediately, as there are still plenty of areas with excessive risks and high valuations which could catch investors out. Instead, we will be working to identify opportunities as they arise while considering the data and associated risks. There is a wall of money with institutional investors waiting to pour into new opportunities away from overvalued large cap markets, with inflows to UK small and mid-caps this week seeing a large influx from professional investors.
It has certainly been a challenging year for markets, however with opportunities now returning to the UK and global trade conditions improving, it will be a long road ahead, but there are plenty of reasons to be optimistic going into 2020.
As this is our last market commentary for 2019, we would like to take this opportunity to wish you all a very Merry Christmas and a Happy New Year from all of us at OCM. The next commentary will be on the 2nd January.
For more information on the results of the UK Election and what this means for UK assets going forward, please see the attached Market Update document.
Key Events We Are Watching This Week:
- Thursday: UK Retail Sales for November, BoE interest rate decision
- Friday: US, UK Q3 Final GDP
Model Portfolios & Indices
Global equity markets demonstrated a high level of volatility over the week amid growing global trade tensions centred around US-China trade talks, while UK markets were dominated by political news and subsequent sterling movements. The OBI portfolios remain defensively positioned, however over the week we have been allocating back into certain areas of the equity markets as economic conditions change, retaining cash for opportunities as they arise. The portfolios gained over the week owing to the strategic changes made to the portfolio to remove the barbell and re-allocate to UK small/mid cap assets, with changes made in recent weeks expected to continue to provide further support to portfolio performance going forward.
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 as we initiate a return to the normal portfolio allocation.
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 1966, Dr Seuss’ “How the Grinch Stole Christmas” aired for the first time. It went on to become a perennial holiday special. The story was adapted in 2000 for a feature-length film starring Jim Carrey.
Have a great week,
Jason & Gina