INVESTMENT UPDATE– AUTUMN 2019

Featuring:

  • Market recap
  • Summer rotation
  • Why is risk back in favour?
  • Growth to Value switch

Market recap
Our last update in August reported that financial markets had posted strong and consistent year-to-date gains. All major global stock market indices had delivered double-digit returns in ‘one-way traffic’ fashion.

Gains were not just confined to shares – almost all asset classes participated in the widespread positivity. Even some traditionally defensive assets, such as Fixed Income, posted returns north of 10% as interest rates globally declined, in some cases, falling into negative territory.

Summer rotation
Since then, something of a rotation appears to have taken place. UK 10-year Gilt yields fell as the year progressed, halving from their high of 3.25% a year ago to just 1.53% by August. This was a steep and rapid decline by all accounts.  However, since August, US 10-year Treasury yields have rebounded to 1.84% (at the time of writing) after reaching almost 2%.

This increase in the price of money has had notable ramifications for the pecking order of global asset classes since then. Defensive assets, such as Bonds and Gold, have fallen mildly over the past few months, giving back a modest portion of their prior gains.

Risk assets, more broadly, have continued their rise, extending progress from earlier in the year. Global stock market sectors with a defensive slant – such as utilities (-2%) – have under-performed more aggressive cyclical sectors – such as banks (+9%).

Perceived riskier regions, such as Emerging markets and even Britain (based on recent volatility), have been doing better than average since our last update. As has Japan, which is globally orientated due to the Asian region’s importance within global manufacturing and technology supply chains.

Why is risk back in favour?
US interest rates have been reduced three times since July, reacting to fears that without cheaper capital, the global economy faces recession.  Bloomberg also highlighted that out of 57 key global Central Banks, more than half have cut interest rates during 2019. The majority of these are in emerging economies. Markets are seeing this immense global monetary stimulus as a ‘safety net’, even in the face of weaker economic growth.

With many global central banks getting ever closer to running out of ‘monetary ammo’ – as interest rates get closer to zero – investors are speculating the next move will be fiscal expansion, should economies weaken. In plain English, the next hope would be for large scale global tax reductions or co-ordinated government spending programmes to inject money into the global economy. The market has taken this as a further positive backstop.

Historically, such developments have proven good for firms and consumers in the near-term (Stocks) and bad for presenting inflationary risks in the long-term (Bonds or richly priced Growth stocks).

Growth to Value Switch?
There is growing anticipation and discussion over when investors will switch preference for investing in the winners of recent years (the expensively priced Growth stocks – where KMD is underweight) into the laggards (the cheaply priced Value stocks – where we are now overweight).

Our analysis suggests this trend has not yet picked up in a meaningful way. A notable out-performance – from Value over Growth stocks – has begun, albeit only in British and European stock markets covering just the past few months.

The UK’s FTSE 250 equity index – a barometer for domestically orientated firms, aka Brexit victims – has surged by 10% since the middle of August, in advance of a positive Brexit outcome looking increasingly likely. Sterling also rallied by circa 5% against most major global currencies over the past three months as the pendulum swung modestly away from extreme pessimism.

However, such Value-to-Growth rotation trends have been far smaller and quite short-lived in the US and Japan, albeit some past big winners have fallen back.  In the Asian region, the reverse trend has actually taken place, perhaps in hope of a trade war resolution which would be supportive of their technology/growth driven economy.

We therefore do not yet see evidence of a full reversal into those Value companies, which history has favoured over time.  It is more likely this is a sign that some of the (cheaply priced) casualties of Brexit simply got too cheap and have since seen their prices rebound accordingly (from an oversold position) as Boris Johnson appeared to make some progress towards ending the Brexit saga

KMD portfolios – last quarter
The dynamics over the past three months have been very helpful for our portfolios as some of the lost ground has been worked back versus comparable benchmarks. We have benefitted from conventional Bonds under-performing (as we think these assets are overpriced), Sterling assets out-performing (we think these are too cheap) and Growth assets net under-performing (these are too expensive).

The sheer speed and scale of the snap-back of UK domestic stocks, in particular, highlights just how quickly (and by how much) undervalued assets can re-price in the event of a sudden rush of the herd. We continue to prefer being early into ‘sensible’ trends, given the impossibility of market timing, even if these may frustrate when not moving in our favour.

We believe this mini-rotation – since our last Investment bulletin – may well serve as a possible warm-up to some of the trends that could eventually reward the patient, long-term investor.

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
BSc (Hons), IMC, MCSI, MIMA
Chartered Wealth Manager
Investment Manager

www.kmdpwm.co.uk

November 2019

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

LONDON – CAMBRIDGE – STANSTED – SAFFRON WALDEN

KMD Private Wealth Management Ltd
Stansted Office (All correspondence)
Western House, 2 Cambridge Road, Stansted CM24 8BZ
Tel: 01279 647663

London Office
10 Fitzroy Square, London W1T 5HP
Tel: 020 3778 1100

Cambridge Office
4 Brooklands Avenue, Cambridge CB2 8BB
Tel: 01223 750100

Saffron Walden Office
9 Market Row, Saffron Walden CB10 1HB
Tel: 01799 521 900

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– SUMMER 2019

Featuring:

  • 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
BSc (Hons), IMC, MCSI, MIMA
Chartered Wealth Manager
Investment Manager

www.kmdpwm.co.uk

September 2019

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

LONDON – CAMBRIDGE – STANSTED – SAFFRON WALDEN

KMD Private Wealth Management Ltd
Stansted Office (All correspondence)
Western House, 2 Cambridge Road, Stansted CM24 8BZ
Tel: 01279 647663

London Office
10 Fitzroy Square, London W1T 5HP
Tel: 020 3778 1100

Cambridge Office
4 Brooklands Avenue, Cambridge CB2 8BB
Tel: 01223 750100

Saffron Walden Office
9 Market Row, Saffron Walden CB10 1HB
Tel: 01799 521 900

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

Featuring:

  • 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.




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