Our market views in the context of our investment process and strategies
November 2019 - Firm equities and volatile bonds
Recent data have confirmed the ongoing softness of the global manufacturing cycle, but more importantly, it also confirmed that the US is not on its way into a recession. The US service sector is growing and, if anything, accelerating, and the recent labour market reports, confirmed that both wages and hiring are growing. Added to this, both the US and China have repeatedly confirmed that progress is being made on the trade negotiations. On this basis, Fed President Powell made it clear, that US monetary policy is “in a good place”. On the corporate scene, the ongoing US earnings reporting season is now well on its way with more than 350 of S&P 500 companies having reported results with marginally better beat ratios than usual. The positive news flow from companies, credit markets and politics are captured in our algorithms, which are still signalling a positive outlook. It has also been reflected in the US equity markets which has moved back to a new all-time high. The outcome across all the strategies that we manage has been widespread gains in equity and credit holdings.
October 2019 - This does not look like the typical start of a US recession.
Following the recent data releases, it is now clear that we are in the middle of a global manufacturing recession, but also that the current state of the US economy does not look as though it is at the beginning of an outright recession. The weakness in the manufacturing sector does not look strong enough to trigger an outright recession. Specifically, the more significant consumption side of the US economy is receiving strong support from the labour market, financial conditions and the housing sector. As conveyed by the business cycle component of our algorithms, the credit and consumption side of the economy is looking too firm and we are therefore positioning our strategies as positive.
September 2019 - Deteriorating fundamentals
Volatility returned to financial markets in August and has remained with us into September. Global macro fundamentals have deteriorated further and, with dovish statements from the leading voices of both the FOMC, the PboC, and the ECB, we have seen a continued decline in government bond yields across most of the developed world. Towards the end of August, the US President added to volatility and uncertainty by lashing out on Twitter against both the Chinese and the US Federal Reserve. The trade conflict is now weighing heavily on global manufacturing, as reflected most recently in the sharp drop in the US Manufacturing ISM released in September. In this environment of increased macro and market uncertainty we have seen a sustained decline in our market condition algorithms and we have therefore shifted our multi asset portfolios from “Positive” to “Defensive” positioning.
August 2019 - How much monetary policy easing?
July proved to be yet another good month for global as well as US equities, which reached new all-time highs. Credit spreads also tightened during the month and macro fundamentals improved marginally. Our algorithms moved further into positive territory and we therefore maintained a full risk exposure across all strategies. The positive market development lasted until the very last days of July and only really made a decisive turn when the FOMC statement and the following press conference disappointed markets with its lack of clarity and dedication to an easing policy.
July 2019 - Everything moves in cycles
As the correction in equity markets unfolded in May, our algorithms declined significantly, and we highlighted the first actual and potential allocation changes in our strategies in the June edition of this publication. As it turned out, the algorithm driving the risk levels in our traditional portfolios never reached the levels that trigger risk reductions and it has now stabilised and started a tentative recovery. As a result, the Systematic Equity Allocating Portfolio, the Diversified Income Portfolio and the Global Fixed Income portfolio all captured the full increase in equity markets in June and into the first days of July. As equities and bonds continued their rallies, the strategies therefore reached new all-time highs and moved beyond those levels during the last days of June and into July.
June 2019 – How much damage has been done?
The S&P 500 index reached a new all-time high on 30th of April and markets seemed calm then. However, things change over the first weeks of May as the US President re-started the trade war and the rhetoric led to renewed market volatility. For markets, the consequences have been that equities decline every single week of May, credit spreads widen, and government bonds rallied, with yields continuing their trend through all of May and into June leading to the first risk-correction of the year. The investment implications are less certain and depending on the preference for risk.
May 2019 - Calm for now?
By most standards, April was a less eventful month than normal in financial markets, with few major blow ups, no directional changes in macroeconomic outlook, and most central banks confirming their overall intentions by making adjustments and fine-tuning to signals and policy. With no immediate issues to solve or fires to put out in European or US financial markets, things seemed calm as April turned into May and our strategies returned to all-time highs in the final days of April. However, it would be rashly optimistic to expect this calm to continue.
April 2019 - Trends and Challenges
Throughout March and into early April, financial markets have made further progress, with both bonds and equities recording gains. Having been taken by surprise, worries expressed in the media turned to the signals of declining growth yields and gave rise to talk of a potential global recession. Such worry is somewhat overstated, we believe. From the point of view of our systematic investment process, several other factors also pointing towards increased market risk would additionally be required in order to make us change our portfolio positions.
March 2019 - Drivers of growth and performance
Two of the invariable features of the global financial market are that we are always facing long term trends and short-term challenges. Following an upward movement in global equities of roughly 10%, the question that we are most frequently asked in recent months is whether markets can continue to rise after such an advance. A simplistic answer would be that in the same way that markets typically drop further after a 10% correction, they typically advance further up after a 10% increase.