Equity markets declined this week and risk off sentiment spread throughout markets as President Trump’s surprise decision to implement fresh trade tariffs on a further $300 billion of Chinese goods ratcheted up the US-China trade war, leaving investors running for safety amid increasing downside risks.
As equity markets declined following the news of a renewed US-China trade war, economic fundamentals remain weak across the globe, with downward pressures beginning to feed through into weaker Q2 corporate earnings and full year expectations. Given a declining economic backdrop which is faced with increasing uncertainty, the fresh bout of Trump tariffs could be the catalyst we have been waiting for to bring about the market decline, with US, European and UK markets down 4%, 5% and 6% respectively over the week.
We have opted to maintain a defensive strategy since December due to increasing downside risks and weakening economic fundamentals, implementing a capital preservation mandate to protect client assets from the threat of a sharp decline in markets. While this has meant that we have been left frustrated when the markets have rallied on optimism over trade resolutions and monetary policy shifts in the first half of the year while ignoring the economic data, we have maintained our conviction stance in the face of declining economic conditions. This week, we have benefitted as a result of that defensive strategy, as the barbell approach with a downward tilt implemented within portfolios brought us back above or in line with the benchmark for the 1 month, 3 month and 6 month views.
We remain optimistic about returns going forward, expecting further weakness in markets over the coming week, owing to little demand for risk-on assets given downward pressures and a lack of factors to push growth upwards in equity markets. We continue to watch market movements carefully, and we are prepared to act should economic conditions improve, or as markets find a bottom. As always, we will keep you updated on any changes to our positioning, however for now we are well positioned to benefit from current market conditions.
For more information on what has been moving markets over the week, please see the attached Market Update document
Key events this week: • Thursday: China July Export and Import Data • Friday: UK Q2 GDP and Industrial Production, Japan Q2 GDP
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 declined as downside risks increased following President Trump’s surprise announcement of potential new tariffs on $300 billion of Chinese goods which ratcheted up the US-China trade war, escalated by the yuan’s breach of the 7 mark on Monday, in a move which was regarded as a retaliation from China. Safe haven assets such as gold gained alongside bonds, as risk-off sentiment continues to spread within financial markets. 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.
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 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 1960, The West African country known as Côte d’Ivoire (Ivory Coast) gained its independence from France after being a member of the French Community for 2 years. Ivory Coast became a French Colony in 1893 under the leadership of explorer Louis Gustave Binger. Felix Houphouet-Boigny became the first president of the independent country and remained in office until his death in 1993.
Jason & Gina