• Rising Markets in 2019
  • But is it all plain sailing?
  • In the UK
  • KMD Portfolio Stance

Rising Markets in 2019
Financial markets have generated solid positive returns during 2019 so far. This marks a welcome rebound from the weak final quarter of 2018, in which global stocks lost roughly one-fifth of their value, peak-to-trough. The rebound began during the Christmas week – a good present if ever there was one for investors!

Global economic slowdown dynamics – potentially with a likelihood of recession at the extreme – now form the central scenario on global economists’ notepads.

This may sound strange and contradictory given that markets have risen sharply, fully recovering from prior losses in many instances. However, this should not surprise the experienced investor. Financial markets are generally one or two steps ahead in pricing in certain outcomes ahead of time. On this occasion, markets came to be relieved that the US Federal Reserve (the equivalent of the Bank of England) acknowledged a weakening global economy and has since cut US interest rates in response (coming to the rescue, so to speak). This also led to a reduction in market-based interest rates across the globe.

In effect, this could be viewed as an extension of the global Quantitative Easing (QE) stimulus trade for another couple of years should the Fed be able to hold recession at bay.
Importantly, it is this bigger picture trend that has essentially been responsible for driving strong financial market returns over the past decade – with potentially more of the same for a little longer yet – explaining the market’s satisfaction in recent months.

But is it all plain sailing?
The Bond market is aggressively warning otherwise. There is the small matter of possible global economic slowdown or recession actually being bad news! President Trump’s imposition of tariffs has not helped the cause, slowing growth in China and Asia. While Germany is teetering on the brink of recession following consistent weak manufacturing demand as global uncertainty has increased.

Back in November, US Treasury 10-year interest rate yields (the global yardstick for the price of money) peaked at roughly 3.25%. At the time of writing, this interest rate has halved to just 1.60%. The same trends have been seen globally too, with UK 10-year Gilts paying out just 0.50% now.

Such trends imply that future economic prospects are likely to be weak (on the basis that future interest rate cuts will be needed to prop up a sick economy over an extended period).
Fixed Income instruments have rallied despite the poor value on offer before the latest leg up (to sound like a broken record).

Strange market dynamics have come to fruition. Germany issued a 30-year bond this week paying no interest. Should inflation accrue at 2% per annum over this period, the investor will have lost 45% in real terms when they come to receive their money back in 2049. Similarly, a negative rate mortgage product has recently been launched in Denmark (a discount on your house purchase price anyone?). There is also the small matter of roughly $15trn of global debt that is paying a negative interest rate (the investor pays to lend their money to the Government, corporate etc.).

When the history books are eventually written, we cannot help but think that this period might be looked upon as one of the biggest debt bubbles in history.
The eventual ending could prove to be very nasty given that global debt continues to rise at pace. Although perhaps this day of reckoning has been pushed further into the future.
The recent surge in the Gold price already signals that some investors have been viewing things in a similar vein.

In the UK
Closer to home, Boris Johnson became PM following Theresa May’s resignation. Sterling assets have dramatically underperformed over the past quarter in the expectation that Brexit might become a messier issue than was previously considered – Boris’ more aggressive stance is perceived to heighten the chance of a No-Deal outcome.

Despite the gloom, British assets look historically cheap on most metrics. JPMorgan cite an appropriate level for the Sterling/Dollar exchange rate as $1.10 in the event of a bad Brexit versus $1.40 in the event of a positive outcome. With today’s exchange rate at a fraction under $1.22, one can see the asymmetry of possible gains that are roughly twice as large as possible losses for the given toss of the coin for the global investor who owns Pounds (there are not many in the global herd left though!).

It is also worth mentioning that the dividend yield of the FTSE 100 – as high as previously seen over the past 30 years – highlights the relative cheapness of global multinationals with a head office here.

Consequently, we are happy to hold ‘out of fashion’ assets when the expected returns would suggest an investment is wise from a historical standpoint (based on analysing as much evidence of the past as we can gather). Multinationals are multinationals after all. Good investments are made at attractive prices historically.
However, brace for a turbulent ride in the meantime (noting we are careful in sizing up our portfolio allocations to individual regions including the UK).

KMD Portfolio Stance
Finally, we believe it is worth reminding our clients that our portfolios have typically been able to contain losses better than the average investment portfolio has done during falling market periods (falling by less).

The flip side of relatively conservative positioning is performance lagging in the most recent fast rising markets.
Many of our All Weather funds are expected to offer protection when it might be needed. The recent weakness in a fast rising market is, in fact, providing us with further confidence that they are definitely in the tortoise camp.

Our portfolios are structured with sustainability of returns in mind – with implied long-term returns based on current valuations being the key consideration. We are happy individually with how these investments are allocated even if in the shorter-term the market is currently rewarding the hares.

We prefer to be the tortoise not the hare as we are simply uncomfortable with many of the valuation dynamics in the market.
The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

Dean Aitchison
Chartered Wealth Manager
Investment Manager

September 2019

Copyright © 2019 KMD Private Wealth Management, All rights reserved.


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KMD Private Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. FCA no. 803600. Registered Office: 8 High Street, Brentwood, Essex CM14 4AB. Registered in England no. 11059008.

Investment Update– Spring 2019


  • Momentum continues
  • Tech Supremacy
  • Watching Number 10
  • Are we there yet?

Momentum Continues

The New Year brought with it a fresh wave of optimism. Our last Update indicated that stocks rose early on this year, resulting in the best January for 30 years. That momentum has continued beyond Q1, with US markets now back to the highs of 2018. The UK has also enjoyed a rebound, albeit not quite back to its peak. In this latest run, both equity and bonds have benefitted from softer inflation and signals from the Federal Reserve that interest rate rises are to remain on pause. In fact, the Treasury market is actually pricing two rate cuts, in line with the currently inverted US yield curve. With a strong labour market, we think the Fed will be patient before making any move from here. However, some key officials have indicated that the Fed may be more inclined to allow above trend inflation to make up for previous years where it was below.

Tech Supremacy

It is hard to gauge if President Trump’s political agenda concerning China is wholly focused on his belief that they wish to achieve ‘technological supremacy’. That said, we do appreciate the concerns over security and Intellectual Property rights. Huawei became one of the latest casualties of US policy with firms being banned from trading with them unless they have a Government license.  Several other Chinese video surveillance firms may also be blacklisted soon as well.

Amidst the trade tensions, only one thing is clear – policymaker’s lives are a bit more complicated these days. While trade tariffs are inflationary in the short-term, they also risk a slowdown in growth. The former would usually imply ‘rate rises’, the latter ‘rate reductions’. Having potentially already moved rates up too far, a ‘wait & see’ approach seems most appropriate from here. We believe that any escalation in the trade war is more likely to drive rates lower and in line with previous priorities on growth. This is important as many signs still indicate interest rates remain the key influence on markets. Rising interest rates played the biggest part in both the 2018 sell-offs, as well as contributing to the recent rebound following prospects of a change in direction.

Watching Number 10

We cannot overlook the influence of global political events in the short-term, with Brexit also back in the spotlight. Theresa May’s support hit an all-time low following the rejection of her latest ‘new’ deal. The biggest market impact so far has been a slide in the pound, now commonly used as a ‘Brexit barometer’ – with greater weakness being evident during times when a ‘no deal’ or ‘hard Brexit’ appear more likely, such as now.

Theresa May’s resignation could increase the chances of a ‘no deal’ Brexit, not least because approximately two thirds of Conservative Party members (responsible for picking the new leader) think ‘no deal’ is a good idea. As the support for Nigel Farage has just demonstrated, perhaps a ‘Brexiteer PM’ such as Boris Johnson may now be the only way for the Conservatives to win more votes. However, any new leader would still be faced with current party divisions and lack of a majority. Therefore, the risk of a general election cannot be entirely ruled out.

To some extent, the slide in the pound is likely to be factoring in the increased risk of a Labour government – which markets would view negatively, if only off the back of expected tax rises. We feel these risks should be balanced against the increased chances of a second referendum, rather than a new Prime Minister calling a general election and risking becoming the shortest serving PM in history. In that event, one could read into the popularity of the Brexit Party meaning a ‘Brexiteer Win’ would be most likely in a second referendum.

While the news is in the headlines, there is always a danger of markets over-reacting and to some extent, we feel the pound has probably factored in the increased Brexit risks for now. In the long-term, we still see scope for Sterling to grind higher from here and are positioned for this.

In recent years we have reduced exposure to foreign currencies. Therefore, while our portfolios will not lose out from a weaker pound, we will not gain significantly from overseas funds. However, overall, our preference towards UK funds should benefit as internationally-focused, UK-based firms become more competitive and experience improved earnings from their foreign revenues. Our commodity positions will also benefit from being priced in dollars.

Are we there yet?

We expect political factors will contribute to volatility but on the positive front, they should also contain interest rate rises. This may provide a future opportunity to top-up equity positions on market weakness, as valuations become more appealing against dismal savings rates.

With low interest rates, manageable inflation, a low oil price and fair valuations (with the exception of the US) markets may not yet be in overheat. However, risks of slower growth remain amid political uncertainty, fading stimulus and a more challenging environment for company profits with rising wages and trade wars.

A slow-down in earnings could easily be the catalyst for the next downward move, although in reality, equity market falls tend to precede earnings slumps. Ultimately, we need to see growth risks recede for the current upward trend in equities to be sustained. This may be difficult in what has already been a very long economic expansion by historical standards. One in which the growth in earnings have been trending above GDP growth for some time. This cannot be sustained forever since earnings are just one component of GDP. US Earnings (or profits) have grown faster than usual in recent years, as they did in the 1920s and 1990s. They reached their pre-crisis high in 2011 and have since grown more than 50% faster than the average growth rate of 4%.

Mindful that the ‘fixed interest’ alternative to equity still offers little growth potential, we are not reducing equity at present. Instead, we continue to add to value stocks which have been a slight drag on performance and will continue to be if ‘growth’ or even ‘sentiment driven’ investing continues to beat fundamentals-based ‘value’ investing. We keep a close eye on this position maintaining discipline within our strategy as our long-term conviction in value stocks recently hit its highest level.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.

Newsletter – February 2019

As the end of the 2018/19 tax year approaches, we look at some areas that you may wish to review:

  • ISAs (Individual Savings Account)
  • Pensions,
  • VCTs (Venture Capital Trust) & EISs (Enterprise Investment Scheme)
  • CGT (Capital Gains Tax)
  • IHT (Inheritance Tax).
  • Also please see wealth management

Deadlock at Westminster…but no real surprises

Should you be weary of hearing about the ‘B’ word and its ramifications, you may, of course, wish to fast forward through the first part of the update and focus on our general investment stance which you will find at the end.

  • As widely anticipated, Tuesday’s vote on Prime Minister Theresa May’s withdrawal agreement was voted down by what proved to be the largest ever margin in political history.
  • Subsequently Jeremy Corbyn tabled a Vote of No Confidence which, when taken to the vote come out in favour of the Government.
  • While Mrs. May’s agreement lacked support, she still appears to have enough Party backing to avoid a potential General Election in the short-term

Continue reading

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