Fund Management Monthly Commentary

Transcription

1 Fund Management Monthly Commentary Covering the month of January 2019 January Market Update Margetts monthly diary discusses major economic and market developments that occur over the month. It is written by the Fund Management team. While equity markets closed 2018 on a negative note and many investors sentiment became less favourable, the start of 2019 was positive, with major equity markets ending January with gains. In 2018 investors entered the new year with strong expectations and in good spirit despite hefty valuations prevailing in both bond and equity markets. Later in the year the markets became nervous about the slowdown in the global GDP growth and revised their earnings expectations. Aside from the recent negative press coverage of worries surrounding the global economic slowdown, the global GDP is expected to continue to expand at a rate of c.3.5% and earnings are expected to grow further. In markets for goods and services, buyers often search for deals which offer the same product at a lower price, however this logic does not always apply to investors. Given the relatively strong fundamental backdrop and more attractive valuations, it would be logical if investors felt more excitement about the year ahead, however due to fear and panic, many people reduced their equity positions during market falls in Q In its January Economic outlook, the IMF suggested that the potential no-deal Brexit and the slowdown in China are the two biggest threats to the future global economic growth. It is our view that both of these risks are highly political and hard to position for. The outcome of Brexit remains highly uncertain. To gauge market sentiment, investors could look for clues in the movement of Sterling and its recent appreciation against the US dollar and the Euro is likely to suggest that markets now price in a lower probability of a disorderly Brexit and lean more towards a softer scenario. On Tuesday the 29 th of January Theresa May won the vote in the House of Commons on the Brexit deal amendment, calling for alternative arrangements on the backstop plan to avoid the hard border between Ireland and ern Ireland. In their response, Michel Barnier and Jean Claude Juncker rushed to reject Mrs May s plans to renegotiate the deal, however a number of leaders of European countries now indicate that a compromise is possible. We aim to look beyond Brexit and believe that longer term UK large-cap stocks are in a good position to outperform. Companies in the FTSE All Share index on average provide a strong dividend yield which soothes market falls. C.60% of earnings of the FTSE All Share index come from overseas, hence if Sterling was to depreciate under a no-deal scenario, companies with international exposures are likely to benefit from it. Equally, due to political risk being priced in, on the basis of popular valuation multiples (P/E, P/B, P/S) the UK equity market looks relatively cheap, hence in the case of a softer Brexit, we expect these risks to fade away and markets to reprice. UK based investors who currently have a negative outlook on UK assets and hold overweight unhedged positions in global stocks and bonds, should also take the relative value of Sterling into consideration. When adjusted for inflation and trade flows, Sterling looks significantly undervalued when compared to the US dollar and the Euro. Under these circumstances, UK based investors should consider the potential

2 upside of Sterling in a soft-deal scenario as much as the potential downside of UK assets in a no-deal scenario. If Sterling was to appreciate, international investments are expected to depreciate accordingly, creating headwinds to portfolios with international bias. We feel that the slowdown of the China s economic growth is in line with the current size of its economy and the way the country developed from an exporter of relatively low value-added goods towards a more capital-intensive manufacturer. There are some signs and rumours suggesting that the trade war between China and the US could be resolved in the near future. Both sides have indicated that some progress is being made and Donald Trump suggested that a new summit with the China s president, Xi Jinping, could happen soon. During this trade war there have been some casualties from both sides. Huawei was in the epicentre of the escalation of trade tensions, accused by the US of stealing technological secrets, spying and avoiding the sanctions regime imposed on Iran. On the US side casualties seemed less significant, however many companies such as auto manufacturers and Apple admitted to a slower demand coming from China and the potential disruption to their supply chains if tariffs were imposed. In the US, sugar rush returns from the Trump s tax relief have now waned away. The US government shutdown, which started in December 2018 and ended on 25 th January 2019, put further pressure on the market sentiment. Following uncertainties affecting the US economy, the Fed surprised the market by changing its more hawkish stance to a dovish position in January, indicating that future rate hikes will be somewhat slower. We remain relatively more cautious on Europe, which continues to be consumed by various political risks and being subject to external shocks. Germany s economy contracted in Q due to a slower global demand for German products and new emission tests which slowed the pace of German automakers. At the same time, Italy had two consecutive quarters of negative GDP growth. While it is not indicative of an imminent crisis in the Eurozone, it is our view that the EU s economic growth will remain marginal, hence we are either neutral or underweight to Europe in our portfolios. Looking Ahead We are optimistic and feel that 2019 is going to be a good year for risk assets. In the UK we expect for the article 50 deadline to be extended further, while a feasible solution to Brexit can be found. We believe that both the UK and EU will avoid a no-deal scenario. We feel that fundamentals in Asia and remain strong and the recent move towards a slower pace of interest rate hikes suggested by the US Fed is likely to support their valuations. We remain long-term supporters of Asia and in our higher risk portfolios and believe that there is a substantial upside in these areas, driven by better demographics and a larger scope for economic development. We remain cautious on Europe and hold it at a neutral/slightly underweight position across our portfolios. It is our view that while valuations in Europe look relatively cheap, structural risks associated with European politics and the single currency regime are not likely to settle any time soon. Although US equities now look less expensive compared to 6 months ago, they remain one of the most expensive areas of the global equity market. It is our view that US equities are fully priced and while they

3 can continue growing in the short to medium term, we feel that there are some more exciting opportunities outside the region. In summary, we feel positive about returns on risk assets for this year as markets have started 2019 on weaker expectations. We feel that many market participants based in the UK could fail to recognise the potential upside from the revaluation of Sterling, which could become a significant headwind to international investments held by UK residents. Margetts Risk Rated Funds The below charts show the current positions of the funds, the tactical (short term) targets, and the strategic (long term) allocations. We aim to keep the current positions in line with the tactical targets from week to week. The differences between the tactical and strategic targets reflect the views and convictions of the Margetts Investment Committee. Providence 6 5 Compared to our strategic asset allocation targets, the Providence fund continues to be overweight to equities and underweight to bonds. In equities we have an active exposure to Asia, which has contributed to returns in January. Both in December 2018 and January 2019 the portfolio has benefited from strong fund selection. Performance of the Premier Income fund improved over in January and over 12 weeks it has become one of the best performing UK equity funds in the portfolio. The Premier fund has a tilt towards domestically focused UK companies, which have benefited from a recent strengthening of Sterling. There have been no significant changes made to the portfolio over the month and the Investment Committee are happy with the performance of all underlying holdings.

4 Select % 35.0% 25.0% 15.0% 5.0% Similar to the Providence portfolio, the performance of the Margetts Select fund improved in January, as equity markets found a low point and began to rise. The asset allocation effect has now become positive as US markets (which the fund is underweight to) performed in line with other geographical areas. Our fund selection remained strong. With market rises in January, some of our more defensive and valueoriented holdings such as Rathbone Income, Jupiter UK Special Situations, Invesco Perpetual European Equity Income and Henderson Opportunities underperformed their respective IA sectors. All of these funds outperformed during a period of market falls in the second half of 2018, which was in line with our expectations. Performance of the BlackRock Asia fund improved over the shorter term. This fund struggled to outperform in 2018 due to a significant China exposure, which has supported its results for January. The BMO Select European fund has been replaced with the Fidelity European strategy. The BMO fund has been initially purchased as a relatively stable core fund. The fund has undergone some changes recently after its manager changed. The portfolio became more concentrated and biased to growth, which increased its risk and made it less suitable for Select. We have identified the Fidelity European fund as a relatively mixed portfolio with no specific bias and agreed that it will fit Select well.

5 International 6 5 In the International portfolio we continue to favour Asia and and underweight to America. While this positioning has detracted from relative returns in the first 3 quarters of 2018, with the more recent falls in US equities, it has had a positive contribution to the portfolio s performance. Our fund selection was generally good across the board, with the two funds being the best performers over 4 weeks. The fund selection has been slightly weaker in the UK, where the JPM UK Dynamic and Threadneedle UK Growth and Income funds lagged the IA UK All Companies sector. The Committee raised no concerns about the Threadneedle strategy as it has been a strong long-term holding, which is currently in the 1 st quartile among its sector peers over 12 months. The JPM fund will be placed under a review and the Committee will monitor its performance closely going forward.

6 Venture 35.0% 25.0% 15.0% 5.0% Venture s bias towards and contributed positively to its relative returns over the month, as these regions outperformed most Western developed market equities. Fund selection remained very strong, with all but 3 funds outperforming their sectors over 4 weeks. The BMO Select European fund will remain in this portfolio at this stage as its higher risk nature is more applicable to Venture. We will continue monitoring its performance going forward and if it does not improve, the fund will be replaced with another European holding.

7 Important Information Please note that the contents are based on the author s opinion and are not intended as investment advice. This information is aimed at professional advisers and should not be relied upon by any other persons. Any research is for information only, does not constitute financial advice or necessarily reflect the views of the author and is subject to change. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the fund is suitable and appropriate for their customer. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested. Important information about the funds can be found in the Supplementary Information Document and NURS-KII Document which are available on our website or on request. Issued by Margetts Fund Management Ltd Margetts Fund Management Limited is authorised and regulated by the Financial Conduct Authority For any information about the company or for a copy of the company's Terms of Business, please contact the company on or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR You can us at admin@margetts.com