Market movements over the week indicated that volatility is here to stay in the third quarter of the year, as markets struggled to find direction amid trade uncertainty and central bank expectations. After last week’s market turmoil and subsequent yield curve inversion heightened recessionary concerns, this week investors are looking towards central banks for forward guidance as trade conflicts appear increasingly unlikely to find a resolution before the end of 2019. For this reason, against a backdrop of increasing downside risks, developments in the trade conflict and the Fed’s comments at tomorrow’s Jackson Hole Economic Symposium are expected to be key factors influencing market movements over the upcoming week.
For more information on problems facing the US economy and expectations for the Jackson Hole Symposium, please see the attached Market Update document.
As a result of increasing downside risks in the global economy and deteriorating economic data, investors are beginning to take a more risk-off stance, with expectations for a weaker equity outlook for the rest of the year. In line with these expectations, we retain our defensive positioning, however this week decided to remove positions within the portfolio for which we now have a limited return expectation going into the rest of the year. In doing so, we removed some assets which do not typically perform well during periods of economic turbulence and which we did not have strong expectations for given current positioning. This allowed us to lock in profit on these positions amid increasing downside risks, while redeploying cash into defensive assets with greater return potential going into this period of greater uncertainty and equity market weakness.
As part of the rebalance, we reduced multi-asset exposure and increased exposure to UK investment grade and government bonds, which have performed strongly in recent months and which we expect to continue to perform well going forward given risk-off sentiment and favourable monetary policy conditions. We expect that these assets will perform well as equity markets falter, before removing on the improvement of economic conditions and reallocating to equities when the time is right.
Despite our expectations for a decline in equity markets in the near term as a result of deteriorating economic conditions, rest assured that the portfolios are defensively positioned with low equity exposure and limited currency risks in order to preserve capital during this period of economic weakness. The portfolios are also well positioned to benefit from a decline in equities, with relatively stable assets which continue to add returns throughout challenging market conditions in the interim. Based on our current positioning, we remain optimistic on full year returns and remain poised to act to enhance returns as opportunities arise.
Key events this week:
- Today: Eurozone Consumer Confidence for August
- Friday: Jackson Hole Economic Policy Symposium
- Saturday: The G7 meeting begins in Biarritz, France
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 gained over trade optimism and expectations for further central bank stimulus amid rising downside risks in the global economy. Markets remained highly volatile over the week as recessionary concerns remain, with investors focusing on trade and political developments as the data continues to disappoint.
Safe haven assets such as gold continued to gain over the week alongside bonds, as risk-off sentiment continues to spread within financial markets, however optimism over rate cuts yesterday eroded gold’s gains over the week. Equity markets rose as a result, with the large intraday movement reinforcing the lack of direction in equity markets, as equity investors grapple with recessionary fears. It is clear that geopolitical tensions remain, and 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 and a downward tilt which seeks to benefit when equities decline, our portfolios remained flat over the week, before declining slightly yesterday, with the defensive barbell within portfolios performing well.
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 decline 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.
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 1864, The International Committee of the Red Cross was founded in Geneva, Switzerland
to give aid and relief to warring armies during conflict. The Red Cross movement was inspired by Swiss
businessman Henry Durant after witnessing suffering at the Battle of Solferino in 1859. The British Red
Cross was then formed on the back of the movement in 1870.
Have a great week!
Jason & Gina