Please find below our Weekly Market Update for the week ending 1st March 2019.
The intention is to provide a brief insight into the latest dynamics and inform you of any changes occurring within the model portfolios.
Blue Sky Comment
Trade talks
“If all works well, we’re going to have some very big news over the next week or two. And it’s really been terrific,” he said. “I tell you that the whole relationship has been outstanding,” he added, saying that there was just “a little way to go”.
…no this is not North Korea but his views on US/Chinese trade talks.
A few minutes earlier, the US president announced that he was delaying a new escalation in tariffs on Chinese imports, set for March 1st to give more time for negotiations, given how much progress had been made.
Trump needs to reassure markets and keep the US economy buoyant ahead of his re-election bid in 2020.
Pound
“The Pound has strengthened because the downside risks to the economy, posed by a no deal, look less likely,” says Ruth Gregory, Chief UK Economist with Capital Economics, who adds the “developments reduce the chances of a ‘no deal’ Brexit on 29th March, either because Brexit is delayed or because they prompt more MPs to support May’s deal”
Bookmakers have shortened the odds on a second referendum taking place, with one leading betting firm finding a people’s vote is now the most likely Brexit scenario. A Final Say vote before the end of 2020 is a “probability rather a possibility,” according to William Hill who say there is a 54% chance! Mind you, some bookies thought it was a 1/9 bet that we would vote to remain in 2016!!
LGT Vestra Snapshot
Responding to heightened volatility
Towards the end of 2018 we saw an increase in levels of volatility, escalating to the highest level since 2011 during the Eurozone crisis. This was primarily due to three things; fear of a global slowdown caused by either the trade wars or an aggressive stance by the US Federal Reserve (Fed), heightened sensitivity to political risks and the transition from one part of the economic cycle to the next.
In response to the increased volatility in markets, LGTV increased their exposure to cash in the lower risk (Defensive, Cautious and Balanced) portfolios during the most recent rebalance (February MPS Investment Committee meeting). Throughout the spike in volatility back in 2011, they increased the cash position in portfolios to a similar level as today, and as with Monday’s move, it was a short-term tactical decision that gives them the flexibility to deploy the funds when they see an opportunity.
They sold a fixed income holding, moving the proceeds into cash. The fund that was sold was made up of investment grade bonds, high yield (HY) bonds and equities. During Q4, this fund was caught out, alongside other High Yield funds because of the shortage of liquidity during this period of fear in markets. It’s important that fixed income doesn’t correlate with equities, hence the change of strategy.
The sale of this fund has reduced the level of risk within the Blue Sky/LGTV portfolios. Fixed income is an extremely difficult part of the portfolios to manage, and this has been the case for quite some time. The Fed Chair Jerome Powell’s recent U-turn, although beneficial to equity markets, adds further uncertainty to the equation for bond investors especially now that the yield curve has ‘flattened’.
Importantly, they have not changed their exposure to equity funds at this time, keeping holdings in US equities, UK equities, Asia, Japan and Emerging Markets. They have also utilised global funds with growth and income strategies, selecting companies that are likely to generate superior returns as we approach the latter stages of the market cycle. The equity holdings in the portfolio have returned as much as 16% since the start of the year and we continue to see relative value in the equities versus the fixed income market.
Below, you can see the 12-month rolling volatility for the Balanced portfolio, and the corresponding cash position in the portfolio. The below chart demonstrates how LGTV dynamically manage the risk within portfolios throughout the market cycle to generate strong risk adjusted returns.
Source: Morningstar data, LGT Vestra
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