Please find below our Weekly Market Update for the week ending 31st May 2019.
Blue Sky Comment
Market dynamics
As we reported last Friday, equity markets were ‘spooked’ by ongoing trade war negotiations but how often have we said this? Lots of times …now Trump says he is not yet ready to make a trade deal with China..great!
We shouldn’t be surprised by market reaction to all this to-ing and fro-ing, especially when there is a scarcity of other corporate news, as there is this week.
Bond yields are falling, notably with US treasuries which is often interpreted as a recession warning. This has caused further anxiety. It was only 18 months ago however that the markets were worried about rising US treasury yields, signifying that the economy was overheating! In this post Quantitative Easing world, however, its important to understand how the dynamics of the bond market have been skewed.
In our opinion, its important to not be swayed by short term market sentiment and noise and invest for the medium to long term.
During the recovery, after the financial crisis, investing into indices which had been battered was understandable on the back of stimulus. However, as the economic cycle continues to mature and volatility comes to the fore, we are even more convinced that an active fund manager is the way to go, when investing. Volatility creates opportunities and this is where an astute, active investment philosophy comes into its own.
LGT Vestra Snapshot
Positive about being active in the US equity market.
LGT Vestra have maintained an overweight position to equities across their model portfolios. They are choosing to allocate capital in areas they believe offer good medium term value in the current climate. They continue to remain overweight in the US, as the region continues to boast robust economic and market data. Last year, they switched out of a passive S&P 500 Index tracker and into an active US equity fund run by Morgan Stanley to get exposure to this geography.
Morgan Stanley (MS) US Advantage is a large cap fund with a long-term growth focus and an emphasis on high-quality, established companies. These companies demonstrate factors such as strong brand recognition, sustainable competitive advantages, positive free-cash flow yields and decent returns on invested capital trends. Due to the nature of the strategy and the fund’s philosophy, MS US Advantage is underweight on commodities (mining and energy), heavily regulated industries (pharma), capital intensive or leveraged industries (banking) and binary industries (biotech). Thus, consumer staples, discretionary and technology sectors have traditionally been at the fore.
The Morgan Stanley team have a series of preferred characteristics for companies they hold: uniqueness, business visibility, sustainability and magnitude. The team do not use screens to source their new ideas but instead rely on company contacts, industry experts and discussion with management or competitors. Ultimately, the investment decision lies with fund manager, Dennis Lynch. The fund has a low turnover rate, with estimates that 90% of its turnover is at quarterly trading points. Maintaining this approach and keeping the number of positions to 30-45, allows the fund team to successfully uphold their long-term view.
Identifying companies with strong valuations, outside the remit of tariffs, may prove advantageous in the coming months, supporting an active investment philosophy.
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