OCM Commentaries

Market Commentary – 19th September 2018

By September 19, 2018 October 8th, 2019 No Comments

The global economic cycle

Despite all the risks and the worries that the media portrays over the overall global economy, it is fair to say that we are still in a strong place and shouldn’t be too worried about what is going to happen, however should focus our efforts on when it is going to happen…

As we continue through this economic cycle, we are in a phase of scare growth as the momentum is starting to slow down and this is even true in the Purchaser Manager Index (PMI) data that comes out at the start of ever month.

The US economy is without a doubt the driver of the current global as the economy just continues to keep surprising the upside with no signs of slowing down. The US is a closed economy in that sense where it really isn’t influenced by the rest of the world as it continues to do what it does. We could expect the mid-late cycle to be extended slightly in the global economic cycle based on various stimulus packages in the markets. Things that have resulted to this bull run are the corporate tax cuts and strong performance from oil and banking stocks which have helped buoyed the market in 2018, and currently tech stocks continue to remain very supportive on the upside which is what is driving the markets. The economics remains strong and supportive; however, the politics are driving the risks. We are now in a mid-late cycle stage of the economic cycle and this will continue to remain the case until 2019, where we can expect a slight slowdown in global growth and a correction or a recession in 2020.

Source: Legal and General Investment Management

What about Brexit

Brexit is dominating most of the news this week as Theresa May is preparing for her Salzburg summit, which is anticipated to form the first stage of a UK-EU agreement. As time is running out the EU’s other 27 countries are feeling the pressure to agree a deal with the UK, however one of the main problems is the issue being the Irish boarder and the UK’s membership of the customs union.

The International Monetary Fund (IMF) has issued a warning this week over the costs of leaving and the costs to the UK Economy, which we have highlighted in many previous commentaries to being

extremely resilient. Current growth expectations for the UK growth of 1.5% in 2018 and 2019 are based on a broad-based Brexit agreement, however a disorderly exit could derail growth and pose serious risks to the UK economy. As a potential no deal situation becomes increasingly likely, markets continue to display high levels of volatility.

A disorderly exit from the European Union could likely result in high levels of disruption to the UK economy, which will cause short term confusions at the borders and uncertainty over people and process which would consequently affect corporate sales and profitability, thereby reducing growth and increasing the deficit, not forgetting a devaluation in sterling. Consequences of a no-deal Brexit would be rising unemployment and a housing market decline. If we think about the current situation of the housing market, the reason why UK property is so expensive is purely due to foreign direct investment pushing up the overall average price as foreign investors deem UK property to be a safe haven asset.

As we continue to notice more uncertainty surrounding Brexit, companies are announcing bold Brexit strategies in preparation for the possibility of a no deal exit from the EU. As the UK economy remains in the hands of political debate this week, rest assured that all possible scenarios are being thought off and have probably been priced into the markets.

What about the Trade Wars?

President Trump announced on Monday that the US impose a further $200 billion of tariffs on Chinese imports. This has now come on top of the 25% on $50 billion of imports implemented earlier. This will now be imposed in two phases.

1. Starting on the 24th of September 2018, the US will impose 10% tariffs on the additional $200 billion of imports

2. On the 01st of January 2019, the tariffs will increase to 25%.

Now what is interesting is that if China retaliates, the President threatened to impose tariffs on a further $267 billion of imports.

The trade wars have simply developed over a lack of communication, strong ideological beliefs and basically non-negotiable strategic ambitions. Even though Trump ended his war declaration saying that he had great respect for the Chinese government, renewed trade talks are most likely off the table in the immediate future.

President Trump has issued an ultimatum to China to surrender unconditionally or to face unprecedented tariffs, however they are not willing to surrender either despite the administration being very clear about its desires to end what it deems to be unfair trade practices. Economists are estimating that the combined 25% tariff on $250 billion of imports from China alongside Chinese retaliation of 25% on all US exports will impose a drag on real global GDP and will probably bring it down by 0.7% in 2019 and threatened tariffs on a further $267 billion could potentially cut GDP growth by around 1%!

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 increase with most of the major indices showing gains. The S&P 500 index continues to rally and reaching record highs which further adds to the statement that this is the longest bull run ever! It would be good to have a form of correction, so we can then reposition the portfolios and be set for some gains. US data remains supportive and the economy is firing on all cylinders with no sign of slowing down. In Europe, the CAC and DAX exchanges have gained momentum once again and this could maybe be a sign of Europe picking up the pace again derived from indications of improvements in consumer sentiment. Market data continues to suggest that the lower unemployment is creating wage growth in key developed nations, which is expected to boost spending and sentiment going into Q4. This reinforces our expectations of a continued extension to this bull market.

The fund managers we employ in the model portfolios each possesses a different investment process and source of alpha (growth) with limiting beta (risk). OBI combines managers who complement one another’s styles to reduce beta without compromising alpha. By adopting a more multi asset focus with complementary styles, we can focus on the fund managers ability to provide the returns we look for in our models.

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 1970, the country fields of Somerset, begin to rock as the Pilton Festival opens at Worthy Farm. Some 1,500 revellers dig glam-rock band T. Rex at Michael Eavis’ open-air music concert that will later be renowned and attended by hundreds of thousands. The Glastonbury festival was born!

As always have a wonderful week and stay safe.


Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager