OCM Commentaries

Market Commentary 4th September 2019

By September 4, 2019 October 8th, 2019 No Comments

Economic data disappoints as consumers come under strain


As recessionary concerns remain elevated and risk off sentiment looms over financial markets, this week the economic data published for August broadly confirmed our expectations for a further deterioration in key economies, most notably the US and UK, with PMI data suggesting worse conditions than expected in the underlying economy. As it stands, global growth is cooling, accelerated by trade uncertainty and political turmoil, however up until now the consumer has remained relatively strong, propping up economic activity. Essentially, there is a lot of weight on the shoulders of shoppers around the world, and the strain is beginning to show.

Demand has been under pressure in recent months due to threats ranging from US-China trade tensions to Brexit, hitting business confidence and investment, leaving the consumers as the main drivers of economic growth, with tight labour markets spurring on the consumer. There are now signs that consumer strength could be ebbing away, as the downturn in manufacturing seeps into hiring and financial markets tighten amid the trade war. These factors working together could lead households to retrench, increasing recessionary fears. This is particularly true for the US economy, where US consumers are the key factor standing in the way of a contraction. A warning signal came last week when concerns about tariffs and inflation caused the University of Michigan US sentiment index to decline by the most in almost seven years.

This could spell trouble for the global economy centred on consumers, and a key risk is that labour markets may start to unravel as a result of the manufacturing weakness. Surveys show that employment in manufacturing is falling around the world: Germany has seen initial signs of weakness in its labour market, UK sentiment is falling as a result of Brexit uncertainty and Asian economies have recorded declining consumer sentiment. In the US, all eyes will be on the Non-Farm Payrolls jobs data out on Friday for signs of weakness in the US labour market. Until now, strong jobs markets have prevented central banks from adding significant stimulus and signalling more concern for economic growth, however the situation could soon shift given the escalating US-China trade war, weaker corporate earnings, ongoing manufacturing recession and Brexit uncertainty.

For more information about this week’s Brexit-related developments, please see the attached Market Update document.

Given the potential for a shift in labour markets and deteriorating consumer confidence, downside risks remain high and are only increasing as time goes by, emphasising the need for caution given current economic conditions. On the intra-week movements, equity markets are moving on headlines rather than the underlying data, with trade and political developments carrying greater weight, however with the fundamentals deteriorating this is likely to eventually be reflected in equity prices. Given the fact that markets have so far been ignoring this data, we expect this to result in a sharp decline in equity markets and are therefore retaining our defensive positioning and capital preservation strategy. The underlying data is painting an increasingly bleak picture of economic health, and with trade concerns continuing to weigh on the outlook further, the data should not be ignored.

Key events this week:
• Thursday: US ISM Non-Manufacturing Data for August
• Friday: US Non-Farms Payroll and Unemployment Data for August, Eurozone GDP for Q2

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 on trade optimism 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. Equity markets gained over the week overall, however the intraday movements reflected the lack of direction 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 gained over the week, with the defensive barbell within portfolios performing well. After declining last week, the benchmark gained significantly this week on the back of sterling movements, however given sterling volatility and Brexit developments expected over the week, this is unlikely to be sustained.
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.

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 1998, Google was founded. The internet company, now synonymous with the act of finding information on the world wide web was created by Larry Page and Sergey Brin. It started as a research project when Page and Brin were doctoral students at Stanford University.

Have a great week!

Jason & Gina