After most global indices ended the month of May with substantial one-month declines, this week markets kicked off the summer months with a more mixed performance as central bankers weighed in on the weakening sentiment and increasing risks in the global economy. Over the week, as global trade tensions escalated with President Trump threatening new tariffs on Mexican goods, the World Bank reflected on a weaker global outlook, reducing its 2019 growth expectations from 2.9% back in January to 2.6%. In its Global Economic Prospects report, the bank cited a reduction in business confidence, a deepening slowdown in global trade and sluggish investment as key factors driving the downgrade. Over the week it has become clear that there are underlying weaknesses in the global economy which are beginning to feed through into financial markets, with central bankers beginning to adopt a looser monetary policy stance in a bid to combat slower growth and a weaker economic outlook.
For a more detailed review of markets over May and key shifts in central bankers’ stances over the last week, please see the attached market update.
While equity markets continued their declining trend last week as a more bearish tone spreads through financial markets, markets gained on Tuesday and Wednesday as optimism over a potential Fed rate cut lifted short-term expectations for equities. As a result, US markets gained over the week, however we view this as being a short-term effect, as a rate cut implies that the Fed sees considerable weakness in the US economy to warrant further stimulus.
Overall, given the current economic backdrop and an escalation of trade tensions in recent weeks, the risks facing equity markets remain excessive, and we continue to see a further decline in equity markets ahead. For this reason, we retain our defensive positioning and remain confident in the asset allocation within the portfolios, which benefit from a low level of volatility via their barbell-like, balanced construction and a downward tilt which benefits when equity markets decline. While markets continue to fluctuate, the portfolios experience relatively steady performance, gaining in recent weeks as the market has declined.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the week, most global equity markets declined as a result trade tensions and weaker economic data. The exception to this was US markets (apart from the NASDAQ which suffered from tech-related trade uncertainty), gaining on short term optimism that a Fed rate cut would boost corporates. As the OBI portfolios remain defensively positioned with limited equity exposure and a downward tilt which benefits when markets decline, our portfolios were up overall over the week. The recent performance of the OBI portfolios against the benchmarks highlights the ability of the portfolios to quickly regain ground during periods of uncertainty. Over the month view, the portfolios outperformed the benchmark, and over the 3-month view, performance is beginning to converge. This illustrates that when equity markets do decline, the portfolio is well positioned to benefit.
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.
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
Today marks the 75th anniversary of the 1944 Normandy Invasion known as D-Day. The battle, code named Operation Overlord commenced with the landing of 155,000 Allied troops on the beaches of Normandy in France to liberate Western Europe from German occupation. The allied soldiers quickly broke through the Atlantic Wall and pushed inland in the largest amphibious military operation in history.
Gina & Jason