Fund Management Diary Meeting held on 11 th December 2018 Losing Momentum After a strong start to the year, global growth peaked in the first of 2018 and doesn t look like regaining momentum. Trade tensions have escalated and don t look like subsiding any time soon. Financial markets are already showing concern at the prospect of a slowdown in the United States economy next year. In this month s diary we reflect on some of the key themes from the past twelve months. Three key points stand out: (i) global growth peaked in the first half of the year; (ii) trade tensions have escalated; and (iii) financial markets are showing concern at what lies ahead. The global economy entered 2018 on a firm footing but has since lost some steam. Momentum was sustained in the first half of this year as the fiscal stimulus in the United States helped to offset slower growth in other economies. However, after hitting a seven-year high of 4.4 per cent in the second quarter, world gross domestic product growth fell to 3.2 per cent in the third quarter. What s more, the latest surveys and hard data suggest that this earlier momentum hasn t been regained over the past few months. Overall, Capital Economics expects global growth to come in at 3.7 per cent this year, which would be marginally higher than last year s 3.6 per cent. In advanced economies, the slowdown has been broad-based. The United Kingdom s economy struggled at the start of the year on the back of poor weather and Brexit uncertainty seems to have dragged on investment. Gross domestic product is set to expand by 1.3 per cent for the year as a whole, down from 1.7 per cent last year and the weakest since the financial crisis. What s more, Brexit uncertainty is unlikely to disappear in the immediate future. Despite the United Kingdom and European Union reaching a deal for a transition period and a declaration of a future trading relationship, it is still uncertain if the deal will prevail or be renegotiated, if the United Kingdom will leave without a deal, or if Brexit will be cancelled altogether. Elsewhere in Europe, the euro-zone struggled in the first half of the year as temporary factors and a stronger euro hit export growth. Meanwhile, a slump in car production as producers struggled to comply with new emissions testing procedures hit growth in the third quarter. Overall, the euro-zone economy seems set to expand by 2.0 per cent this year, down from 2.6 per cent in 2017. The United States has been the strongest performing major advanced economy this year. This is the main reason why growth for advanced economies as a whole will only be a touch weaker than in 2017. 1 The tax cuts introduced by Donald Trump have helped to bolster consumer spending and gross domestic product growth has accelerated to almost three per cent, up from 2.2 per cent last year. These tax cuts have, however, resulted in a widening of the Federal budget deficit, which is now close to four per cent of gross 1 Capital Economics expects advanced economies gross domestic product to grow by 2.2 per cent in aggregate in 2018, just a touch weaker than the 2.3 per cent recorded in 2017.
domestic product. And with the fiscal boost set begin to fade early next year and signs that rising interest rates are starting to affect activity, economic growth is likely to slow sharply in 2019. The threat of protectionism from Donald Trump was a common theme again in 2018. However, while the threats made in 2017 appeared to just be election campaign bluster, they became reality this year. Admittedly, after more than a year of negotiations, the United States, Canada and Mexico did agree to a replacement deal for the North American Free Trade Agreement, which Donald Trump had previously called the worst deal in history. Nevertheless, the changes made won t have major macroeconomic implications for any of the three economies. But tensions have escalated with China. So far, the United States has imposed tariffs on $250 billion of annual goods imports from China. Although production of these goods generates a little over one per cent of China s gross domestic product, much of the damage to Chinese demand has been offset by a weakening of the renminbi. The two sides did agree to a ceasefire of new measures at the start of December, but there is a clear risk that this latest truce will prove short-lived and output could suffer in 2019. Domestic factors are the main reason behind slowing Chinese growth this year, with pollution controls weighing on industrial production growth at the start of the year. Meanwhile, officials have focused on reining in financial risks for most of the past two years and their efforts have led to a slowdown in credit growth. This is likely to continue to weigh on activity into next year. Policymakers have responded to the slowdown by loosening monetary conditions, but given the usual lag between changes in policy and activity, economic growth is likely to continue slowing until mid-2019. Capital Economics expects growth to average 5.3 per cent this year, down from 5.8 per cent last year. 2 In other emerging markets, Argentina and Turkey suffered currency crises. However, most emerging markets are less vulnerable to contagion than they were in the past and there were limited spill-over effects onto other economies. Elsewhere, gross domestic product growth accelerated in India and picked up in Latin America. This helped to keep growth for emerging markets as a whole constant at around 4.5 per cent in 2018. It has been a mixed year for financial markets. started the year strongly as they were buoyed by tax reform in the United States and healthy growth in the global economy, before mounting concerns about protectionism, regulation and geopolitics dragged on markets. Concerns about the outlook for China also weighed on emerging market equities. The S&P 500 managed to shrug off the trade worries that took a toll on equities elsewhere and reached a new peak in September. However, the market has since sold off on rising concerns about the impact of rising interest rates in the United States and prospects for growth in 2019. Capital Economics expects worries about the outlook for the United States economy and a slowdown in global growth to intensify, and the trade war is likely to rumble on. They think that the S&P 500 will fall further next year, perhaps to about 2,500 from around 2,650 now. This is likely to drag on equities in other markets as well. And with the Federal Reserve set to call time on its tightening cycle next year, United States Treasury yields are likely to continue to fall in 2019. 2 Capital Economics China Activity Proxy.
Strategy Overall, 2018 has been a turbulent year, with increased market volatility and what has felt like increased political risk compared to 2017. The broad direction of our strategy has remained unchanged, we continue to favour equities over bonds on a risk adjusted returns basis. Within bonds, we have favoured short duration over longer dated assets, which has come to fruition this year. Our preference for Asia Pacific ex Japan and Emerging Markets equities over US equities in our higher risk portfolios has both hindered and helped at different points in the year. We continue to believe that UK equities are attractively valued, and expect performance to recover once some of the political risk has passed. Next week (18 th December) will be the last Investment Committee meeting and diary of 2018, the first meeting in 2019 will be January 8 th, and the next diary will follow shortly after.
Fund Comments The below charts show the current positions of the fund, the tactical (short term) targets, and the strategic (long term) targets of the fund. 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 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 07/12/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. The tactical allocations to cash and bonds have been amended slightly, cash has been reduced by 0.5% and bonds increased by 0.5%. The team feel that bonds offer a potentially higher return than cash, this also brings the bond target and current allocation closer together. Cash is being used to top up the UK equity allocation to bring these allocations closer to their tactical targets. Fund Selection: The bond funds in Providence have outperformed their respective sectors over 12 weeks, with the Royal London Global Index Linked fund showing the strongest performance in absolute terms. In the equity holdings, the L&G Asian Income fund has been the top performer over 4 weeks, and the Royal London UK Equity Income fund has lagged the sector the most. Overall, the team are happy with the fund selection and no changes are being considered at present.
Select 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 07/12/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the tactical targets this week, while the bond allocation was reduced slightly and the proceeds invested into UK equities to bring these allocations closer to their targets. Fund Selection: The UK and UK Equity Income holdings in Select are feeling the effects of political uncertainty and volatile markets. The funds that have exposure to more domestic stocks, SVM UK Growth and SLI UK Equity Income Unconstrained, have struggled as Brexit has unsettled markets. The depreciation of the Pound, however, has been a welcome tailwind for businesses that are more international, as their exports are more attractive. The Jupiter UK Special Situations, BlackRock UK Income and Rathbone Income funds, which invest in these businesses, have therefore outperformed their sectors over 12 weeks. The Committee are comfortable holding the weaker funds, as the reason for their current performance is understood and not expected to be a permanent factor.
International 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 07/12/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the tactical targets this week. Small sells were made from the Asia Pacific ex Japan and Emerging Markets equities allocations and the UK equity allocation topped up to keep the allocations in line with their targets. Fund Selection: The JPM US Select fund has outperformed the IA North American sector over 6 months, and is currently 1 st quartile over 12 months. Both the hedged and unhedged shareclasses of the Schroder Tokyo fund have performed strongly over recent weeks, while the Baillie Gifford Pacific fund has lagged the Asia Pacific ex Japan sector, due to its large holdings in Chinese Technology firms, which have performed poorly lately. No changes are being considered at present.
Venture 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 07/12/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the tactical targets or current allocations this week. Fund Selection: All of the underlying Asia Pacific ex Japan funds have outperformed the IA Asia Pacific ex Japan sector over 12 weeks, while the Emerging Markets holdings have had more mixed results. The Fidelity Emerging Markets fund has suffered due to its relatively large allocation to Chinese Technology companies, while the more defensively positioned JPM Emerging Markets Income fund has performed strongly, due to its relative underweight to those stocks. The team are pleased with the overall underlying fund selection in Venture.
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 0121 236 2380 or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR You can e-mail us at admin@margetts.com