• 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

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