Conventional Managed Portfolio Service Portfolio 2 Commentary Third Quarter 2018

Transcription

1 Conventional Managed Portfolio Service Portfolio 2 Commentary Third Quarter 2018 In brief The Conventional MPS portfolios delivered flat to positive returns over the quarter, as geopolitical events continued to dominate market sentiment. The US significantly outperformed all other global markets during the quarter, therefore our overweight exposure to US equities was the strongest regional contributor. Maintaining an underweight position in UK equities was also beneficial. Although the backdrop of rising interest rates put fixed income under pressure, our overall manager selection within global high-yield bonds was favourable for the portfolios. A stronger dollar and country specific issues and concerns over a full-blown US-China trade war had a pronounced impact on emerging market hard and local currency debt. Global overview Global investment markets have recently struggled to find direction. While economic data remains relatively robust, newsflow is troubling. Broad economic indicators growth, inflation, unemployment and purchasing managers indices (PMIs) continue to be positive, corporate profitability remains solid and there is nothing in economic theory that says bull markets die of old age. Economies are now running at full capacity nearly everywhere, causing central banks to worry about the risks of inflation. Accordingly, they have started the process of removing the extraordinary monetary stimulus of the last decade. There is palpable nervousness as to how the monetary web that has been spun can be unwound without causing fright among investors. Moreover, this comes at a time when the economic outlook has become a little less enticing, as the surge in synchronised global growth of late 2017 has faded. We expect the global economy to experience the third broad-based slowdown in this economic cycle but we would stop short of predicting a recession; the balance of probabilities still tilts towards a positive prognosis for risk assets. The US bull market is now the second-longest on record, and the economy continues to perform well. However, the turbo-boost from tax cuts is expected to wane, resulting in more sluggish growth. Monetary policy continues to tighten, with the Federal Reserve (Fed) delivering its third interest rate hike of the year in tember and a fourth is a racing certainty for December. Yet, at the same time, the US has embarked upon trade conflicts with China and other developed economies, increasing economic uncertainty and, if it goes too far, slowing growth. Higher US interest rates and a stronger dollar have also added to the stresses of emerging markets, particularly for more vulnerable economies such as Turkey and Argentina. The US economy continues to enjoy a Goldilocks scenario; it is neither too hot to force the Fed to ratchet up interest rates at a fast pace, nor too cold to slow down corporate earnings. It is hard to say where we sit in the current US economic cycle but one would suggest that it is in its latter stages. Yet history suggests that this has no bearing on equity market returns; often markets have some of their best days in these latter stages. Some commentators believe a trade war could lead to an economic slowdown and therefore, lower inflation. Conversely, we believe the US-China trade war will feed through into increased inflation. Tariffs automatically increase the price of Chinese imports. If these imports go directly to the US consumer, they pay a higher price. If these imports go to a USbased manufacturer (e.g. a car manufacturer), Conventional Managed Portfolio Service Portfolio 2 01/05

2 then the US manufacturer will pass on the increased cost. If this US manufacturer decides to buy a US product as a substitute, one would probably concede it would be more expensive than its Chinese alternative (pre-tariff) and, again, this cost increase would be passed to the US consumer. Furthermore, should US manufacturers look to US companies for these products, the US company in question has to be in a position to make them (i.e. it needs more workers). With the unemployment rate below 4%, this may prove a challenge, and would almost certainly lead to increasing wage pressure. Meanwhile, the UK s economy was more attuned to the US recovery until the Brexit referendum. While the raw economic data remains encouraging, there is a growing sense of nervousness as negotiations move towards a no-deal scenario. Both major political parties are beset by infighting as the rhetoric on hard- Brexit, soft-brexit, no-deal and talk of a re-run of the referendum intensifies. The recent party conferences did nothing to end talk of leadership challenges for the Conservatives or Labour, all of which leaves sterling at the mercy of the foreign exchange markets. The City was shocked at the recent inflation figure of 2.7% (annualised) analysts had expected a fall to 2.4% and immediately started pricing in further rate hikes from the Bank of England. As interest rates have remained extremely low for 10 years, even one or two rate rises would significantly raise mortgage repayments and intensify financial pressure for the barely getting by generation. However, this rise in inflation was largely driven by clothing, transport and theatre prices, and happened over a very hot August. We question whether this is merely a blip rather than a trend. We remain positive on Japanese equities as the domestic economy continues to expand. Fuelled by governmental growth-policies and a supportive central bank, Japan enjoys a very low unemployment rate, but wage growth historically hasn t been a problem. The pre-tax profit margins for Topix-listed companies have consistently hovered between 2% and 4% since the 1950s. Since 2011, this has steadily risen to 6%. Furthermore, the recent rally in the US dollar versus the yen added to the attractiveness of the Japanese equity market. Lastly, emerging market economies have been weighed down by a slowdown in Chinese credit growth, tighter US monetary policy and ongoing fears of a full-blown US-China trade war. The Chinese have been quick to implement policies to support the domestic economy, and this should provide some respite for those countries that rely on Chinese demand. However, emerging market economies that rely on funding from external markets typically those that rely on US dollar debt have found tightening US monetary policy challenging. Some have been forced to increase domestic interest rates to support their currency Turkey and Argentina now have domestic interest rates of 24% and 60% respectively which will undoubtedly put a strain on domestic growth. Following the great recession of 2008, central bankers employed a variety of untested and extraordinary measures to avoid a great depression. Interest rates were slashed, often into negative territory and central banks now hold circa $15 trillion of assets on their balance sheets. While this led to a boom in both equity and bond markets, it has failed to create any form of wage growth or price inflation. Interestingly, new Fed Chair Jay Powell noted that inflation may no longer be the first or best indicator of a tight labour market noting that in the run-up to the past two recessions, destabilising excesses appeared mainly in financial markets rather than in inflation. Are we to assume by this that the world s foremost central banker has given up watching for rising inflation as a prompt to increase interest rates? For a long time, most economists have worked with an understanding that economic downturns cause market downturns, yet the opposite may now be true. Indeed, most recessions since WWII have followed stock market collapses. Performance Although the backdrop of rising interest rates in the UK and US put fixed income under pressure, our overall manager selection within global highyield bonds was favourable for the portfolio. In the alternative investment segment, global real estate investment trusts (REITs) posted positive returns. In the UK, the FTSE All Share Index was in negative territory over the quarter; therefore, maintaining a regional underweight position was beneficial. We have maintained overweight exposure to US equities through the year and this was the strongest regional equity contributor over the period. The Schroder Asian Income Fund provided solid positive returns, underpinning the Fund s defensive qualities with the MSCI Asia Pacific ex Japan Index posting a negative return over the quarter. Conventional Managed Portfolio Service Portfolio 2 02/05

3 Activity During the quarter, we replaced the PIMCO GIS Real Return Fund with the Royal London Global Index Linked Bond Fund. Outlook There has been a tremendous push by global regulators to reduce the likelihood of another financial crisis. The financial system is better capitalised than before, yet there are still pockets of unease. Furthermore, equity valuations are fair to mildly expensive yet nowhere near the heady valuations of the tech-boom era. All things considered, we would contend that the next downturn will have its roots in rising interest rates and wage inflation, filtering through to a slowdown in corporate profits. However, we cannot rule out a geopolitical misstep hastening this process and trade tensions exacerbate this problem. Global economic growth remains solid but we are markedly less positive on the mediumterm outlook. The portfolios continue to be diversified across multiple asset class but with a tilt towards equities, as we remain constructive on the global outlook for the remainder of the year. Conventional Managed Portfolio Service Portfolio 2 03/05

4 i Performance figures are net of the Standard Life Wealth Discretionary Management Charge. However they do not include the deduction of product and adviser specific charges. The effect of these charges would be to reduce the performance levels shown. In addition, MPS portfolios are subject to fund level annual management charges, which vary over time in line with the composition of the portfolio. Please refer to the relevant Managed Portfolio Service Annual Charges Summary for more information on charges. ARC Private client indices ARC private client indices are based on actual client portfolio returns provided by various investment management companies. These portfolio returns are allocated to one of four categories based on the volatility of their returns relative to world equities, and an average return is calculated for each category. Grouping portfolios by their volatility differs from the traditional approach, which compares portfolios which have similar asset allocations. Instead, investment managers may use whatever asset allocation they consider appropriate to achieve the desired levels of return and volatility. Portfolio performance is based on Standard Life Wealth MPS hosted on the Standard Life WRAP platform. Please note that portfolio constituents and performance may vary on other platforms. The Portfolio has not been available on all Platforms since inception. Performance: Conventional MPS Portfolio 2 3rd Quarter years Since Inception ¹ Volatility Since Inception % Conventional MPS Portfolio ARC Cautious The performance figures may vary due to product specific charges and should be viewed on an indicative basis. ¹ 30/11/ /09/2018 Volatility calculated using daily returns. Any holdings referred to relate to the SLW MPS managed via the Standard Life WRAP platform. Differences in holdings may occur on other platforms due to fund and shareclass availability. Performance: Conventional MPS Portfolio 2 Inception to end Q Conventional MPS 2 16 ARC CAUTIOUS Conventional Managed Portfolio Service Portfolio 2 04/05

5 Portfolio performance is based on Standard Life Wealth MPS hosted on the Standard Life WRAP platform. Please note that portfolio constituents and performance may vary on other platforms. The Portfolio has not been available on all Platforms since inception. Asset Allocation: Conventional MPS Portfolio 2 Asset Allocation MPS Model Strategy 2 as at end June 2018* MPS Model Strategy 2 as at end tember 2018* Change +/ UK Government Bonds 10.0% 10.0% 0.0% UK Corporate Bonds 11.5% 11.5% 0.0% Global ex UK Government Bonds 5.0% 5.0% 0.0% Global Index-Linked Government Bonds 5.0% 5.0% 0.0% EUR Corporate Bonds 1.0% 1.0% 0.0% Global High-Yield Bonds 9.0% 9.0% 0.0% EM Debt Hard Currency 3.0% 3.0% 0.0% EM Debt Local Currency 7.0% 7.0% 0.0% North American Equities 14.4% 14.4% 0.0% UK Equities 8.2% 8.2% 0.0% European Equities 4.5% 4.5% 0.0% Japanese Equities 3.0% 3.0% 0.0% Developed Asian Equities 1.7% 1.7% 0.0% Emerging Market Equities 1.2% 1.2% 0.0% Global REITs 4.5% 4.5% 0.0% Absolute Return Funds 7.5% 7.5% 0.0% Money Market & Short-Dated Bonds 3.0% 3.0% 0.0% Cash 0.5% 0.5% 0.0% Total 100.0% 100.0% * The data is rounded to 1dp and small variances to totals may occur. This data is based on Standard Life Wealth MPS hosted on the Standard Life WRAP platform. The figures shown here refer to the past. Past performance is not a reliable guide to future performance. As with any investment, the value of your fund can go down as well as up and may be worth less than you invested. Standard Life Wealth Limited, registered in Scotland (SC317950) at 1 George Street, Edinburgh EH2 2LL. Standard Life Wealth is authorised and regulated by the Financial Conduct Authority Standard Life Aberdeen, images reproduced under licence SLWMPSQR2C_Q318_TCM Conventional Managed Portfolio Service Portfolio 2 05/05