Investment Update – Winter 2019/20


  • Year of the rising tide
  • A brief change in leadership
  • Coronavirus
  • Tech, Growth, the US and everything else
  • Relative cheer for UK stocks

Year of the rising tide
2019 proved to be a strong year all round for investment portfolios.

The first half was broadly comparable to a strong rising tide as, without much exception, significant positive returns were made by the vast majority of asset classes . This applied to both higher risk and lower risk investment types alike.

Such an outcome was in stark contrast to events only one year earlier, as the reverse was broadly true during 2018. How things can change quickly in financial markets!

What caused this violent reversal? The US Federal Reserve (equivalent of the Bank of England) u-turned into cutting interest rates during 2019. This saw off fears that tighter monetary policy might otherwise prove too much for the US economy – and, by extension, the global economy – to bear.

Consequently, the 10-year US Treasury (interest) yield roughly halved from 3% to 1.5% by late August, driving the aforementioned  rising tide of global investment returns.

A brief change in leadership
Once US interest rates stopped falling by late summer, defensive asset classes (Bonds and Gold, for example) generally ceased making further progress and fell back marginally as the tide went back out. In essence,  lower interest rates – driven by US policymakers for the benefit of their own economy – had run their near-term course.

A change of market leadership was consequently observed for the remainder of the year – one that proved useful for KMD portfolios. Non-US stocks saw a rare chance to outperform US stocks and, for  once, the immediate effect of the Fed’s interest rate cuts wore off and risk appetite returned.

The impact of Coronavirus 
However, the unfortunate emergence of Coronavirus called a halt to this dynamic as markets wobbled. US stocks reversed their temporary under-performance as investors sought comfort from the perceived ability of the world’s largest economy to drive its own economic fortune (and from a good economic starting point too). This contrasts with most other regions, all of which are seen to have near-term issues or vulnerabilities of some sort or another.

Driving the divergence, markets became particularly concerned that any longer lasting impact of the virus might, at worst, provoke a slowdown in the Chinese economy. This would, provide deflationary repercussions across the globe and to those directly involved in global manufacturing supply chains. Market analysts fretted that a severe reduction in activity and confidence might present a self-fulfilling negative turn, on top of the weighty debt levels that the Chinese authorities are already navigating.

In particular, commodity markets witnessed steep declines in January as news of the deadly virus took hold. This was seen most vividly through the falling Oil price year-to-date. Copper – often seen as a good barometer of global economic health – also pared back notably. Such indicators can be a warning that global demand (for products) might be dissipating.

Foreign currencies and the stock markets of key commodity producing / emerging countries traded lower, while Japanese and European stock markets fell hard on concerns that these ‘manufacturing centres’ might be especially at risk. The Euro weakened notably.

Despite the unfortunate impacts on a human level, our research leads us to believe that the effects of viruses and similar historical parallels tend to prove temporary to stock markets (on the assumption that viruses get contained sooner or later).

Tech, Growth, the US, everything else – in that order
Despite the high valuations attached to American stocks (and below-average long-term expected returns by implication), it is clear that the nation’s strong near-term economic health contrasts with that of the rest of the world. With President Trump continuing to put America first, this dynamic does not look threatened anytime soon, potentially explaining investors’ recent preference for US stocks in the face of global concerns.

Technology and Growth stocks have surged in recent days/months/years – take your pick! This is despite eye-watering price tags  that often translate into weaker returns ahead, despite the undeniably great stories.

There have been numerous examples of investors who have tried to swim against this tide by ‘fighting a bubble’, only to then nurse losses through being too early in the trade. This is despite probably being ’right’ in their ultimate investment theses. There was no shortage of investment grandees who were sacked following a wave of redemptions,  shortly before being proved right in the 2000 Tech bubble!

We are conscious that when the excitement of the herd takes priority over more dull valuation logic, many of the bears or ’sensible guys’ will inevitably face tough questions over their more pedestrian (but controlled) levels of performance. Meanwhile, the more ’reckless’ investors continue moving higher at full throttle until they hit the top (with likely catastrophic results). The lead-up to this dynamic is especially tough to navigate (it doesn’t feel good to be coming second best), but we always try to maintain both a long-term perspective and patience at all times. The need for careful risk management is critical. It is imperative to survive first and then be right in a controlled fashion, rather than the alternative of being right, but not being around to collect the spoils through being too aggressive too early.

Relative cheer for UK stocks… at last… 
Finally, some mention of UK stocks is warranted following Boris Johnson’s election win. Sterling assets reacted well, both in the run-up to this event and beyond. This was in part due to the removal of some uncertainty by ’getting things done’ and from relief that some of Jeremy Corbyn’s policy threats to business will not come to fruition.

The FTSE 250 index of Mid (sized) Cap stocks – a proxy for those most exposed to the domestic economy – and the Pound Sterling have fared particularly well over the past three to six months.

With global investors excessively pessimistic on UK assets, –  our view is that the pendulum has swung too far –  we feel that the recent past could serve as a possible warm up for what could happen when longer term confidence in British assets eventually returns.

We are not trying to make a call on outcomes, but rather spot that UK assets appear to be cheap and oversold and so offering a return premium. making for a positive long-term investment case.

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

February 2020

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