OCM Commentaries

Market Commentary 1st August 2019

By August 2, 2019 October 8th, 2019 No Comments

Economic uncertainty looms over policy makers as global growth deteriorates

New data suggests that Brexit-related uncertainty and global trade tensions continue to feed through into UK economy, as the Bank of England cut UK growth forecasts earlier today, indicating a one in three chance that the economy will shrink at the beginning of 2020. Following its August inflation report, the Central Bank cut its growth forecast for this year and next, predicting that output will expand by a mere 1.3% in both 2019 and 2020, as economic weakness and low consumer confidence becomes more pronounced in the UK economy. Ongoing global economic weakness continues to feed through into financial markets as Q2 corporate profitability declines, with the Q2 earnings decline for the S&P 500 still estimated at -2.6%. This indicates that companies are starting to see the spill over effects of economic weakness, higher wage costs and trade tariffs on company profits, which is yet to be reflected in equity market valuations. According to the report, although Brexit-related stock piling and factory shutdowns added a layer of volatility to economic performance in recent months, underlying growth appears to have slowed to a rate below expectations, echoing the growing concerns regarding weaker global growth. As a result of continued uncertainty over the Brexit outcome, the nine members of the Monetary Policy Committee voted unanimously to leave interest rates on hold at 0.75% until further clarity is provided on the future path of the UK economy. Uncertainty and weakness remain on the horizon, with risks skewed to the downside as investors adopt a cautious stance given the increasing risk of a disruptive Brexit.

Over the week, central banks across the globe have reiterated growing concerns for the global economy and the economic outlook for the long term as geopolitical tensions weigh in and economic indicators struggle to gain momentum. The Fed cut US interest rates by 0.25% to a range of 2-2.25% to support economic growth and inflation in its first rate cut since the financial crisis, with further rate cuts remaining on the table should the US economy require further stimulus later in the year. It is clear that central banks are starting to observe the impact of the global growth slowdown, however the effectiveness of a rate cut given current economic conditions around the world still remains to be seen given the reactions in financial markets since the rate cut was announced yesterday.

For further information on the Fed rate cut and the impact it is likely to have on markets going forward, please see the attached market update document.

Elsewhere, the European Central Bank remained dovish at its latest meeting last week, as Mario Draghi hinted towards further stimulus through a mixture of interest rate cuts and an expansion of its €2.6tn quantitative easing programme, reiterating a struggling Eurozone economy amid a challenging global economic backdrop. With central banks across the globe now adopting a looser monetary policy stance, it is expected that economic weakness will start to feed into global equity markets in the coming months. While in recent months, investors have been viewing the global economy as being a glass half-full, it only takes one catalyst to tip the balance, and with policy makers now highlighting the cracks in the global economy, the potential fallout could be extremely damaging for risk-on assets. Against a backdrop of weakening global growth, with optimism over a resolution of the US-China trade conflict and aggressive Fed easing fading, equity markets could soon face a rude awakening.


Key events this week:

  • Friday- US Non- Farms Payrolls (labour market data)
  • Monday- US ISM Non-Manufacturing PMI


For anyone who wants further data to substantiate the position please review the attached Global Economic News Document attached and the economic data set for July also attached.

Model Portfolios & Indices

Over the week, global equity markets remained relatively flat as investors waited in anticipation for the Fed July meeting as markets had priced in a July rate cut hoping for a 50 basis points cut, however were disappointed as Chairman Powell announced the Fed would not be going to a full rate cutting cycle and were less dovish than expected. As central banks across the globe become increasingly concerned with the long-term economic outlook and Q2 corporate earnings are still predicted to decline by -2.6%, economic weakness becomes more prominent and will unfold in the coming months. Safe haven assets such as gold and 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 1936, the Olympic games was televised for the first time in history in Germany. The games were transmitted from the Paul Nipkow TV Station to about two dozen viewing rooms set up around Berlin. An estimated 150,000 people watched the broadcasts.


Jason & Gina