Following on from our previous commentary, as we work through this volatile year, the economic data that we continue to look at remains strong globally and the global financial condition still looks in good health (apart from all the politics).
Economic models that economists use continue to show that we shouldn’t be worried about the economic landscape, as the core economic fundamentals remains strong. Financial conditions have only moderately eased since the financial market weakness in February and have remained relatively tight compared to the favourable conditions seen throughout 2017. It is argued that the risks we saw at the beginning of February was exacerbated by the robust growth we had in 2017, and that investors only panicked as to when the end of the cycle was, especially with the US 10 year yield spiking above 3%. As a result, the global sell off we saw was based on elevated valuations being depressed by a drop-in investors sentiment and it has not recovered due to the Tariffs that are being applied by the Trump administration. Data is still supporting of a balanced approach to investing and at OCM we are still being relatively cautious compared to how we would be positioned if the market was say 10% – 20% lower than it is with the same data. We are positioned this way because our value at risk analysis tells us we have limited upside with data slowing and negative risks increasing as we continue with the rate rise cycle in the US and tightening policy.
Overall nothing is simple and we use various barometers (such as those in the attachment) to determine where we are positioned on the economic curve, and talk to many economists and also use their leading indicators to project forward. If we were to summarise the view from these economists, it is that the data is still strong and, yes, we have had a couple of blips in the markets recently, but by no means do they lead to an imminent slowdown in the coming three to six months but that is not the outlook if we were t look at 12 months for example. By analysing this data, it is apparent that the consensus is this year will remain strong, but 2019 will show a general slowdown and an economic recession or a sharp slowdown is inevitable by 2020 if the US continue on the current path of tightening (raising Interest rates). Remember the markets do not sell off when it is happening they look forward and start to sell of as the thesis becomes a known reality and that may coincide with data as yet not reflecting the reality. What that means in English, is that the markets will sell off before the slowdown happens on an expectation that it is about to happen, which is expected as we enter 2019.
Another strong indicator we are closely looking at is government yield curves which are now at their flattest levels since 2007/08 in a few advanced economies which is a positive as regards to their not being an imminent slowdown. Yield curves are generally thought to be good leading indicators, and inversions to be reliable signals of an upcoming recession. An inversion is when the short term yield is higher than the long term and shows that short term interest rates are higher than the long term forecast. Therefore, on the face of it, the flattening yield curves (where short and long term rates are similar) suggest that there is a growing risk of a recession that would not as far as the US is concerned be an isolated event as it is still the largest economy in the world, and would therefore involve several major advanced economies, taking place in the next couple of years. Given that global monetary conditions are set to tighten and that the trade war looks likely to intensify, the possibility of a recession in the coming years is not remote, however is most definitely not imminent, unless it worsens, which is why the downside is becoming difficult to quantify and risks are high.
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 have a mixed picture. The ones to predominately focus on it’s the US’s S&P 500, Dow Jones and the Nasdaq as the US is known to lead the equity markets. As they are all in the positive, this means that investors sentiment overall is strong, and we could expect markets to reach record highs based on strong corporate earnings and strong economic data. With the UK, the FTSE 100 continues to be volatile, however we must not forget the direct inverse relationship it has with Sterling. As sterling continues to be depressed with the results of the Brexit negotiations and campaign, Sterling will continue to remain volatile, and hence would the UK financial markets. With Asian stock markets, Asian shares have been under pressure from a growing trade dispute between the US and China. The Reserve Bank of Australia’s board members flagged their concerns over trade in minutes from their most recent central banking meeting which was published yesterday. It is without a doubt that an escalation of trade tensions could harm global growth by undermining confidence and delaying investment decisions and could dampen international trade.
With our model portfolios, these have been seeing modest growth in line with the strong economics and the non-equity element is acting as a hedge to protect from the risks. The gradual growth is in line with our expectations and we would expect the mandate of OCM and out OBI portfolios to retain capital and capture the upside when the markets prevail.
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
Happy 100th Birthday Nelson Rolihlahla Mandela! As I am sure you’re aware, Nelson Mandela was a South African anti-apartheid revolutionary, political leader, and philanthropist who served as President of South Africa from 1994 to 1999. He was the country’s first black head of state and the first elected in a fully representative democratic election. His government focused on dismantling the legacy of apartheid by tackling institutionalised racism and fostering racial reconciliation. Ideologically an African nationalist and socialist, he served as President of the African National Congress party from 1991 to 1997.
As always have a wonderful week and stay safe.