As this is my inaugural quarterly commentary since arriving at Creechurch Capital to take charge of the investment team, it would be nice to be faced with greater certainty regarding the financial market prospects than is currently the case. The situation, certainly from a UK perspective, is nearly entirely focussed on Brexit and as such at the mercy of each political manoeuvre, or perhaps more accurately each ill-advised stumble. That said in many ways coping with, and taking advantage of, uncertainty is what I intend to be the hallmark of my tenure setting Creechurch’s investment strategy. However, that is yet to come and right now it is useful to look back at Q1.
After a negative final quarter of 2018, it was pleasing to see that 2019 has started on a positive tone. As highlighted in the previous quarterly commentary the ferocity of the sell-off appeared to be unjustified. We couldn’t see a significant deterioration in the fundamentals and often when market movements become overly pessimistic we see a sharp V-shaped recovery.
A catalyst for recovery came as global policymakers have taken on a more dovish tilt amid signs of a more pronounced slowdown in global growth. The US Federal Reserve made a U-turn on guidance provided at the December meeting, where it had earlier indicated that further interest rate increases would be appropriate. The conundrum now for central banks is how to reach escape velocity and the trap of negative interest rates or low real yields, while unsustainable debt levels remain the crux of the problem. In a low growth and low inflation environment two of the levers typically used to reduce a debt problem (growth or inflation), are absent, while the third option of default could potentially put the world’s financial system under severe stress similar 2008. There are c.$10trn of bonds trading on negative nominal yields and many more on negative real yields, which is effectively a transfer of wealth from savers to borrowers or a very slow way of re-balancing the system.
March 2019 marked the 10th anniversary of the US bull market with the S&P500 delivering c.400% in total returns through the period. There has been a lot of commentary about the length of the bull market but US GDP growth through the same period has been very weak compared with previous expansions. In this kind of environment we could remain in the shallow recovery and under typically late cycle conditions for longer than many predict, but the risk of policy misstep remains high. The impact of huge amounts of quantitative easing is largely unknown and central banks have resorted to the caveat they are “data dependant”, which probably highlights a lack of confidence in their understanding of inflation and the dynamics of a changing labour market, including the rise of software technology platforms like Uber and AirBnB (the ‘gig economy’).
The poor performance of equity bourses during 2018 was largely erased during Q1 2019. The FTSE100 +9.50% and S&P500 +13.65% on a total return basis. With the environment generally ‘risk on’ it was also a good quarter for emerging markets and the broad based MSCI EM Index finished March up +9.90%. The recent performance of markets is probably best characterised by the bipolar performance of Chinese equities up c.24% in Q1 having been amongst the worst performers c.-24.5% in 2018. Within the commodities complex, performance was generally positive with the Bloomberg Commodity Index +5.70%, as both WTI oil c.+29% and Brent oil c.+24% performed strongly, while returns from precious metals were mixed with Gold c.+1% and Silver c.-2.5%.
Across the Eurozone problems persist with manufacturing falling, the German economy stalling as far back as Q4 and the lingering political conflicts, mainly Spain and Italy, which continue to keep international investors on the sidelines. The UK, as highlighted at the start, has only one topic continuing to dominate its headlines and with Brexit having now passed the all-important leaving date of March 29th one cannot help but wonder, where do we go from here?
Rather than predicting the final outcome of Brexit, and positioning accordingly, it is prudent to adopt a more subtle strategy – using the recent market positive move to evolve portfolio structure. Clearly an element of profit taking would be wise to release liquidity which could be allocated on any short term correction, favouring low cost, liquid index funds when committed. In addition, the pricing of ‘risk’ in fixed interest markets, away from Aaa credits, is noticeable and longer term value can potentially be established in specific opportunities.
I look forward to discussing the events of the coming quarter in due course and in the meantime welcome any direct contact to discuss specific themes should there be interest.