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Key Themes – November

As we have moved through the year, market conditions have varied culminating a volatile October. This type of backdrop serves to remind us that multi asset investing is beneficial, not being restricted to one asset category. When prices fall in one area, but not in another, it opens up opportunities for us to buy quality assets at lower prices. Agility will bring rewards.

When we speak to our fund manager partners, they are all still constructive on the overall outlook citing generally accommodative monetary policy, robust economic data, attractive valuation levels and strong company fundamentals. However, the positives can at times be masked by worries which push prices down, creating opportunities to invest using positive cashflow, something we are benefiting from unlike many other investment managers. We must stress again that for long term investors negative sentiment is of limited concern. It means potentially higher returns lie ahead provided positive fundamentals remain intact.

Risks remain apparent, but this is nothing new. They have been on the horizon for some time now: Brexit instability, the potential for a US/China trade war and nervousness around interest rate rises in the US. In fact, they have been with us for virtually all of 2018 and this negative sentiment is now being absorbed into prices. We refer to this as, bad news being discounted.

If one examines what has happened in November so far, global stock markets have shown positive returns, bouncing back from October’s volatility, with Emerging Markets and Asia showing clear leadership. Some of our managers have used this as a buying opportunity, accessing assets at more favourable prices in order to target growth opportunities. Investor styles are evolving, no longer being driven by price momentum but the more traditional factor, valuation.

The key is to stay invested, downplay media scare stories and compound up investment growth.

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

Brexit – very much at the forefront of each of our managers’ minds as we move ever closer to March 2019; the official date for leaving the EU. With UK equities pricing on very low valuations, compared to elsewhere, and company data generally strong, they are considering whether now is the time to add to positions. Views are mixed, however around half of our managers are looking towards the FTSE 250 containing more domestically focussed stocks. This provides a way to access UK assets without the potential risk from unfavourable currency movements conferred by large international companies which dominate the FTSE 100. Timing is varied. Some prefer to wait for more visibility on a potential Brexit deal whereas others are already dipping their toes into the water.

Europe – Although headline economic growth has slowed down within Europe falling from what was a strong level. European exporters have benefitted from Chinese economic stimulus measures which has encouraged growth in international tradeable goods. This stimulus has now washed through and is waning awaiting a new splurge. Meantime, domestic focused European stocks look more interesting because confidence, employment and spending is improving across Europe. Italy rolls on in the background, but with a 3% higher yield from Italian bonds compared with German bonds there is evident market pressure on Italy to pay some heed to EU budget constraints.

US Federal Reserve – since December ’15, there have been eight ¼% interest rates rises with rates in the US moving from ‘very accommodative’ to ‘merely accommodative’. Debate with our managers centred on the “neutral” interest rate level, a level that in a healthy economy neither boosts or restrains investment and spending. Our managers felt this could be looked at in many ways and was arguably too theoretical and problematic in estimating. However, overall, the consensus for the path of rate rises within the US was one in December and three in 2019, with the Fed able to pause should any significant cracks within economic growth appear.

US – Our managers are looking towards the G20 meeting in Argentina later this month to see if Trump strikes a deal with Xi Jin Ping around trading. Overall, they are still mostly positive on the US, sticking with their positions believing that US equities are more defensive should we see more volatility, however, elevated valuations remain a concern. There is little conviction that the US trade dispute with China will be settled soon.

Japan – Monetary policy is seen as the most accommodative out of the developed markets, even after the “stealth normalisation” of widening its yield curve controls. The Bank of Japan have avoided deflation and our managers are positive on this area, citing low valuations and a more investor-friendly corporate sector beginning to emerge.

Emerging Markets – arguably the biggest dilemma for our managers as to when to invest. On the positive side, effects from fiscal stimulus within China could come through early next year and valuations are now at very low levels; arguably pricing 25% lower than their developed market counterparts. On the negative side, a strong US Dollar and a hawkish Federal Reserve still, however, weigh heavily with debt costs in US Dollars rising.

Bond Markets – seen as a good diversifier should more volatility appear, particularly government bonds such as UK Gilts. Corporates are seen as less positive, overvalued with yields too close to lower quality paper as to offer a buying opportunity.

Growth v Value – very much in focus all year with, up until the start of October, value the laggard. Our more growth focussed managers have moved to a slightly more defensive stance, cognisant of the strong returns seen this year, reducing both overall equity Beta (market sensitivity), and exposure to the US technology sector.

Diversification – proven to work in October. In general, higher quality bonds and certain alternative assets such as gold and some hedge funds produced positive returns, partially insulating from overall negative equity market returns.