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Key Themes – December

At this time of year it is usual to take stock as we move into a new year. 2018 is ending in a similar way to the start, Q1 saw heightened volatility and we are seeing the same now. Markets are struggling to digest rising interest rates in the US, exactly what happened earlier in the year and was followed by a substantial recovery in Q2 rewarding the majority of investors who sat tight and saw the value of their investments bounce back.

Risks continue to be apparent with some attracting more attention than others as we head towards year end. Trade tensions between the US and China, Brexit and the impact of rising interest rates in the US are in investors’ minds. These risks matter a great deal if you don’t have the high levels of portfolio diversification that we have in the True Potential Portfolios. This doesn’t make us immune to risks but it does mean we avoid the traps that some fall into. Investors need the right solutions to navigate through challenging market environments. Being diversified by geography, asset class, industry or uniquely to True Potential, fund manager style is the best way to do this. Being currently invested in risk assets, balanced against uncorrelated and defensive assets is possible with our Advanced Diversification philosophy.

Our investment partners have identified some strong opportunities including the repositioning of the World relative the US, the strongest main market performer year-to-date. They also see a tactical opportunity to invest in Emerging Market bonds priced in local currency, with EM currencies currently estimated to be 25% undervalued by several of our managers. They also state that many equities are exhibiting cheaper valuations and that decent quality corporate credit bonds’ spreads over risk free government bonds have widened without any noticeable deterioration in credit quality. Long term investors know that opportunities grow more apparent during periods when some panic and sell prematurely in response to over exaggerated risks. This, again, highlights the advantages of multi asset funds, our own exclusive range being the building blocks on which TPP is based.

It is essential to always have in the back of your mind that within multi-asset investment there are a myriad of assets to invest in, always somewhere to find growth, balanced against the need to assess at acceptable levels risk.

Here are the more in depth key points from speaking to our manager partners: –

They see potential in 2019 mainly through a convergence of growth within the rest of the world towards the US, which forged ahead in 2018. The question is will this come from a weakening of US market returns with fiscal impulse waning and the lagged impact of rate hikes or from a strengthening of the rest of the world’s stock markets as investors look to take advantage of areas pricing on lower valuations.

There is a real dichotomy of views on the US. Some of our more valued focussed managers feel that valuations in some sectors such as technology are too rich and pricing is better elsewhere and that fiscal stimulus will start to tail off. Others feel with low unemployment, GDP higher than the rest of the developed world, strong corporate earnings growth and strong consumer confidence, the US will continue to show leadership into next year.

The recent market rally led by the Federal Reserve Chairman, Jerome Powell’s, comments that the central bank’s benchmark interest rate is “just below” neutral, which is the theoretical rate at which level growth is neither stimulated or dampened and keeps inflation at a stable rate, was interpreted as soothing words, but overall unlikely to derail the interest rate trajectory within the US. The market has taken these words as dovish but the consensus from our manager partners is that in the background nothing has changed.

An area our managers are becoming increasing constructive on is Emerging Market bonds, taking the view that Emerging Market currencies are very undervalued after struggling in 2018. If we see improved US/China relations, a weakening of the US Dollar and China stimulus this could act as a tail wind to this asset class.

Overall, our managers see the US Dollar as overvalued over the long term on a purchasing power parity basis, but over the shorter term could continue to trade at current levels.

Rising volatility was understandably discussed with all managers, with investors now accepting the premise that we are moving away from the “goldilocks” scenario of the past few years of low volatility and moderate growth to a more normal functioning global stock market, where price movement is natural. This is seen as offering a strong opportunity set for active managers and stock pickers.

The UK market is currently seen as undervalued, offering opportunity although our managers are cognisant of political risk.

Alternative assets continue as a feature with our manager partners as they look to access returns that are uncorrelated or lowly correlated to global stock markets.