Market Commentary – December 2019

Global equities strong into the year end

Equities around the world ended 2019 on a positive note, after a year of strong double-digit returns from most markets, and expectations of low interest rates and a resolution to the Sino-US trade dispute early in the new year.

UK general election yields Conservative majority

The UK general election on 12th December yielded a result at the very upper end of expectations for the Conservative Party, returning Boris Johnson with a majority of 80 seats – the largest conservative majority since Margaret Thatcher. This, combined with a collapse in the Labour heartland vote, and a poor showing from the Liberal Democrats, who stood on a platform of remaining in the EU, leaves Johnson in a strong position to push the EU withdrawal agreement forward through Parliament. Sterling and UK shares initially responded positively to the Tory win, both rising strongly after a period in the doldrums.

Bond yields rise as investors turn risk-on for Q1

In contrast to a year ago, central banks seemed, during the last quarter, to indicate a willingness to do, in Mario Draghi’s words, “Whatever it takes” to keep the global economy out of recession, suggesting, if not monetary and fiscal easing, then at least, no significant tightening. However, despite rates much lower than had been predicted, and against a backdrop of slowing, but still positive data from the US, investors favoured equities over bonds in their Q1 asset allocation. This pushed shares higher, whilst bonds gave back some of their gains from an unexpectedly strong year.

Asia-Pacific markets buoyed by trade dispute optimism

Asian emerging markets led the rally in global markets at the end of 2019, with returns of 7.5% against 3.0% for developed markets (as measured in USD by MSCI Indices). The Asian markets appear to have been supported by the détente in the US-Sino Trade War, with an agreement on a phase one deal being announced on 13th December, just prior to the proposed implementation of new US tariffs. According to President Trump, the deal will be signed on 15 January 2020, at the White House.

2019 ended on an optimistic note, with Brexit appearing to have an end in sight, and expectations for an imminent resolution to the Sino-US trade dispute, which had been seen as the single greatest threat to global growth. Equity markets around the world were mostly positive during the month, with particularly strong returns coming from emerging markets, which had seen a mixed year, hurt by both the trade dispute and the strength of the dollar.

European returns were dominated by the UK, which rallied strongly in the wake of the Conservative election victory. The more developed western European nations made little net progress, but the overall return was supported by strong rises in some of the emerging economies.

Sterling received a further boost in December, as the Conservative Party won an 80 seat majority in the general election. Sterling reacted quickly, touching 1.34 against the dollar as results were coming in, though after a dip off, and further volatility, it ended the month off its highest levels. The election result is seen as making a smooth Brexit more likely and within a defined time frame, though concerns remain over whether a deal can be concluded before the end of 2020. Dollar weakness was seen against the pound and euro, and also against Asian currencies, which were supported by the prospect of an end to the Sino-US trade dispute.

Once again, in December, across most of the global fixed income landscape, bonds weakened and yields rose. This was despite expectations of global rates remaining low, and indications that central banks will err on the side of monetary easing to keep the global economy growing. Greek 10-year bonds continue to yield less than the equivalent US Treasury bonds, driven by the interest rate differential, which makes European bonds cheap to hedge for a US investor.

*A Generic bond is a theoretical bond that always has the specified tenor, unlike a Benchmark bond, which is a physical bond, with a decreasing tenor.

Thematic investing: Healthcare

In addition to diversifying portfolios across geographies and asset classes, it can sometimes be helpful to use thematic funds to access specific investment opportunities in areas such as digital technology, clean energy or infrastructure. One theme that we frequently use in investment models is healthcare. This is a theme that affords a wide range of investment opportunities, all of which stand to benefit from improving healthcare resources, and the increased demand for them as long-term demographics change. When we think of healthcare, we probably think in fairly narrow terms, such as the goods for sale at the local chemist. In fact the healthcare theme includes diverse sources of return. A healthcare themed fund might invest in any or all of the following:

  • Pharmaceutical research companies
  • Drug manufacturing facilities
  • Medical supplies companies – from bandages to artificial hip joints
  • Medical imaging and diagnostic technology companies
  • Companies that operate managed care facilities
  • Property companies that lease clinics or other medical facilities
  • Employment agencies specialising in medical staff
  • Digital health – manufacturers of smart health monitoring devices, such as smart watches etc
  • Software companies that support any of the above

With so many ways to invest in the broad theme, there is plenty of scope to construct a diversified portfolio that is not dependent on a small number of global companies.

Unsurprisingly, healthcare spending per capita increases with age. Data from the US Centers for Medicare and Medicaid Services estimates that annual spending on healthcare for a 45 year-old is c.$8,370. This figure rises to $15,857 by age 65, and, at 85 years of age, annual healthcare costs are an estimated $37,783. With the trend for greater longevity in the developed world, coupled with the demographic changes leading to an older population, it is clear that healthcare is an attractive and investable longer-term theme. To this can be added the more widespread availability of healthcare technologies. When the first human genome was sequenced, in 2003, it took around three years and cost around $3bn. Today, a human genome can be sequenced in a few days, and costs little more than $100, clearly putting this service within the reach of the man in the street. With this cheaper and more widespread availability of genome sequencing, it is estimated that three new rare disease genes are identified every week, which points to a huge opportunity for gene therapy development.

Whilst the political situation in the US, with President Trump seeking to repeal Obamacare, has created uncertainty in recent times, the underlying demographics do not allow healthcare spending to stall for very long. Who is doing the spending, governments, insurance companies or individuals, is not so important, so there is little doubt that some investment across the healthcare landscape should be profitable in the longer term.

However, timing the entry and exit to maximise profits is best achieved by reference to objective measures, and our proprietary tools allow us to set aside the human emotional response and identify when an opportunity is likely to be presenting itself.

One of the phenomena underlying our models is ‘Volatility clustering’. This refers to the fact that large price movements will tend to be followed by more large price movements, and small movements will be followed by small movements. When viewed in this way, we can identify high-volatility and low-volatility regimes in the time series of a stock, or index. This is important, as it is often the case that investors will lose money in a high volatility regime, and our statistical tools provide us with an estimation of the likelihood that the index is currently in a high-volatility regime. The example above is based on the MSCI World Healthcare Index. Here we can see that there is an estimated 10.05% probability that the Index is in a high-volatility regime. Over the long term, the probability of being in a high-volatility regime is 19.90%, so the current probability is less than the long-run average. However, when the difference between the current and long-run estimates turns positive, this is often an indication that a change in regime is imminent.

To examine this more closely we can look at the output from our ARES system, which takes into account Sentiment, Technical analysis, Volatility and Beta. From the chart below, we can see that all of these measures have been picking up since late November:

Finally, we can look at the trading signal that is being produced by ARES. This is based on comparing moving averages, and is shown in the chart below. When the more bumpy line – the shorter-term average – crosses through the longer-term average, this indicates a suggested change in positioning. When the shorter-term average makes the cross whilst falling, this signals time to sell the Index, or hedge the position. When the cross is made with the shorter-term average rising, this is a positive signal, recommending a purchase, or taking off the hedging protection. Once again in this chart, we see that a positive signal was given in December.

Healthcare is one example of the more than 100 indices that we monitor for investment opportunities every day, including other themes, countries, asset classes and currencies. In this instance, the positive signal from our quant research, combined with our longer-term view of the sector, based on qualitative research, makes this an interesting sector for consideration in the portfolios.

Disclaimer: The information contained in this report is for illustrative purposes only and should not be construed as a solicitation nor offer, nor recommendation to acquire or dispose of any investment. Specifically the share class used to create the illustrations may not be available on all platforms nor be suitable for individual investors. This report was produced by Independent Strategic Research Limited (ISR) for Affinity Integrated Wealth Management (AIWM) and while AIWM and ISR use reasonable efforts to obtain information from sources which they believe to be reliable, neither AIWM nor ISR make any representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are subject to change without notice. Model returns are calculated using the most appropriate share class of the underlying funds, having regard to the illustrative nature of the report, with all income being reinvested. As a result, real portfolio performance may vary from model performance. Where model portfolio histories are shorter than three years, historic model returns are substituted prior to inception date with returns from an ISR performance benchmark. This benchmark is constructed from the average returns of all ISR portfolios with similar risk profiles that existed during that time. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. Affinity Integrated Wealth Management is a trading style of Buryfield Grange Limited, Buryfield Grange Life Planning Limited and Affinity Integrated Wealth Management Ltd. ‘Buryfield Grange Limited’ is authorised and regulated by The Financial Conduct Authority. Not all services provided by Buryfield Grange are regulated by the Financial Conduct Authority. ‘Buryfield Grange Limited’ is registered in England and Wales at Inspire House, 20 Tonbridge Road, Maidstone, Kent, ME16 8RT. Company registration number 4568338. ISR is registered in England and Wales at 34 Southwark Bridge Road, London, SE1 9EU. Company registration number 09061794. Data Providers: Bloomberg L.P. and ISR.