Monthly Update | Happy Christmas for markets?
Stock markets sparkle, the economy lights up and central banks show good will. But could the ghosts of political risk, past, present and future still pay markets a visit?
3 min read
Recent developments suggest it really could be a case of happy holidays for investors.
At Coutts we continue to have a small preference for equities and other risk assets over more defensive investments within our portfolios and funds. As a result, throughout this year we have tilted our investments towards areas that look more attractive in a slower-growth environment, like the US.
Increasing our exposure to European equities was the first step away from that approach for some time. We did it because we think the improving macroeconomic backdrop could lead to Europe’s exports benefitting from rising demand in China.
Supportive policies from the European Central Bank (ECB), including the prospect of fiscal stimulus, are also potentially positive for European equities. A change at the top hasn’t signalled a change of direction. The new ECB president Christine Lagarde used her first official speech this month to confirm her commitment to the direction set by her predecessor, Mario Draghi.
Political upheaval affects emerging markets
Politics has hurt emerging market bonds and equities in recent months. Examples include the Hong Kong protests and political disruption in Latin American countries such as Chile, Colombia and Peru.
We have a low exposure to emerging market equities, with some selective positions in China and Russia where we see particular opportunities. While the improving macroeconomic environment could be beneficial for the region, and a degree of political risk is part and parcel of investing in emerging markets, we remain cautious for the time being.
We are also keeping a close eye on the US dollar as the currency has huge influence over the fortunes of emerging market assets.
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
Important: This graph shows a very isolated period of past performance. For further context of historic performance over the last five years, please see below. As always, past performance should not be taken as a guide to future performance.
Equity Markets Performance (%tr*, local) 12 month performance to end September As at 30 November 2019 Current -1M -3M YTD 2019 2018 2017 2016 2015 Developed Equity (MSCI) 1,761.59 3.2 7.7 25.2 3.5 12.9 18.6 11.2 -0.2 MSCI UK 2,102.83 1.8 2.6 13.4 2.8 5.9 11.1 18.5 -5.9 MSCI UK Large Cap 1,023.79 1.3 1.6 11.8 3.3 6.5 11.2 21.1 -9.1 S&P 500 3,140.98 3.6 7.9 27.6 4.3 17.9 18.6 15.4 -0.6 Nasdaq Composite 8,665.47 4.6 9.1 31.9 0.5 25.2 23.7 16.4 4.0 DJ EuroStoxx 399.34 2.8 7.9 25.6 5.1 0.3 23.3 3.6 3.9 Nikkei 225 23,293.91 1.6 13.3 18.7 -7.8 20.8 26.0 -3.6 9.4 Hang Seng 26,346.49 -2.0 3.1 5.6 -2.7 4.4 23.0 16.1 -5.9 Emerging Equity (MSCI) 58,288.49 0.6 5.2 12.0 0.2 3.0 22.2 13.4 -6.8 BRIC (MSCI) 699.13 1.2 6.3 15.5 3.3 3.6 26.6 14.5 -6.0
Source: Datastream, all returns in local currency; *tr=total return, including reinvested dividends.
Bond Markets 10-year yield* Performance (%, local) 12 month performance to end September As of: 30-Nov-19 -1M -3M YTD 2019 2018 2017 2016 2015 US Treasury index 1.76 -0.5 -1.8 5.1 8.0 -3.7 -3.9 1.7 1.2 UK gilts index 0.86 -1.2 -2.8 6.7 11.7 -2.0 -7.2 10.5 5.9 Eurozone govt bond index 4.40 0.3 1.7 9.3 8.1 -9.7 -2.7 6.1 -2.0 US investment grade index 2.87 -0.1 -0.9 10.3 8.7 -5.3 -2.3 4.1 -3.4 US high yield index 5.59 0.1 -0.1 7.6 1.0 -3.0 2.4 7.5 -9.1
Source: Barclays indices; Datastream; *current yield on benchmark 10-year Treasury, gilt and bund respectively.
Commodity Markets Performance (%, dollar) 12 month performance to end SepteMBER As of: 30-Nov-19 Current -1M -3M YTD 2019 2018 2017 2016 2015 Dow Jones-AIG Commodity Index (TR) 163.75 -2.6 0.6 2.5 -6.6 2.6 -0.3 -2.6 -26.0 Brent oil price (spot, US$ per barrel) 64.50 8.8 5.5 27.6 -26.3 45.1 18.4 2.0 -50.2 Gold bullion (spot, US$ per ounce) 1,461.54 -3.2 -4.4 14.1 23.7 -7.2 -2.9 18.6 -8.1 Dow Jones Industrial Metals (TR) 236.35 -4.9 -2.7 3.8 -2.1 -2.4 24.0 3.7 -25.3
Source: Coutts & Co.
Coutts House View
Equities continue to be supported by improving economic momentum and diminishing geopolitical risk. The ‘phase one’ trade deal between the US and China and a new Brexit deal reduced the two main risks of the year, and UK markets remained calm when the election was announced.
As we expected, the US and European central banks continued with their policy of lower interest rates and continue to talk up support for their slowing economies.
Simultaneously, the US Federal Reserve also started providing large amounts of US dollar liquidity to markets in response to large demand for the ‘greenback’. Central bank actions remain the defining factor of this year’s positive equity performance despite a slowing global economy.
On the fundamental side, our in-house indicators see the probability of a US recession as very low in the short term, having risen slightly over previous months. We have been seeing a slow-down in global economic growth for over a year now, but we believe the business cycle may have bottomed out. In fact, economic data recently released indicates a modest pick-up.
Over 2019 we have generally tilted our allocation towards regions that look more attractive in a slower-growth environment. However, increasing exposure to Europe in October added a more pro-growth exposure to portfolios for the first time this year, reflecting our belief that economic activity will pick up in the coming quarters.
Our two largest holdings remain US equities – the country is seeing the best economic growth – and UK stocks, because of attractive dividend yields and substantial under-investment from overseas due to Brexit uncertainty.
We continue to hold a small exposure to emerging market equities but have a close eye on the US dollar. While the improving global economy will benefit emerging market assets, the state of the US currency is just as important to their performance in our view. A strengthening US dollar has been a headwind for such assets so far this year but this may change. Given the recent, large liquidity injections from the US central bank, more US dollars are now available, potentially weakening the currency. And a weaker US dollar would be positive for emerging market stocks.
US = UK - Europe + Japan - Emerging Markets -
We increased our investment in US and UK bonds throughout 2018 and in the first half of this year. Government bonds provide valuable diversification benefits, particularly in times of volatile markets and slowing economic growth such as we saw over the summer. As fears about macro risks and a potential recession were scaled back in October, bond prices fell. We expect them to continue to drop unless trade fears re-surface.
Outside of developed market government bonds, we continue to invest in specialised credit themes, such as subordinated financial credit and emerging market debt, based on attractive valuations and income and positive prospects over the medium term. In emerging market debt, we hold local currency government bonds and short-dated US dollar-denominated corporate bonds.
Government - Investment Grade - Financial Credit + Emerging Market Debt +
We continue to hold some exposure to UK commercial property and absolute strategies linked to specific investment themes instead of broader funds.
Absolute Return + Property +
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment.
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