Market Commentary – November 2019
Bond yields drift higher on calmer outlook
After the rush to risk-off and the fall in bond yields seen in August, investors have continued to take comfort from US data, which appeared to show the economy still performing relatively well. Sovereign bond yields rose across most of the world as money flowed back into the equity markets.
Sterling gained on election outlook
With the UK General election campaign in full swing, a steady lead for the Conservative Party was a key reason for Sterling strength against the Euro. Currency markets retain a preference for avoiding another hung parliament and the prospect of a majority Government drove Sterling higher.
US market boosted by better economic news
After the macro driven concerns of August, the last 2 months have seen a steady stream of reassuring US economic data. This is less about an accelerating economy and more about avoiding a further slowdown. Retail sales were resilient, the job market data remains strong and although both consumer and business confidence are off their recent highs, by historical standards, they remain elevated. The general feeling that the US economy remains on track for another year of sold growth. Markets seemed to shrug off the latest twists and turns in the US-China trade talks and the President’s domestic political troubles.
Asia subdued; Emerging markets weaker
The continued political turmoil in Hong Kong is now feeding through into the economic data, with 3 months of extremely weak retail sales and the rising prospect of a recession. Elsewhere we continue to see further evidence of the impact of a slowing China and the disruption caused by the US/China trade dispute, with weak export data across the Asia-Pacific region. Political developments in Latin America were also an unhelpful backdrop.
Equity markets continued to rally from the August lows, driven by better economic news from the US. Europe followed the US lead, shrugging off a continued flow of bad industrial data from Germany. In the UK, it was the FTSE250 that led the rally, helped by a stronger Sterling and a more favourable investor attitude towards domestic cyclicals, which have a greater exposure to the FTSE250 than the overseas earnings dominated FTSE1OO. Emerging markets struggled with the political and economic headwinds from Asia and Latin America.
Despite continued poor Industrial data and unhelpful domestic political developments, German equities led Europe higher. This scenario was played out in other European markets such as Italy. France lagged somewhat, thought there was no obvious reason as the economic data here was slightly more reassuring.
Sterling continued to gain against the Euro and the Yen, reflecting market assumptions about the likely election result on Dec 12th. A more positive market sentiment saw the Yen drop back as its’ safe haven status was less in demand. The Euro lacked any catalyst for strength and the US Dollar benefited from the better economic news which then fed into interest rate expectations.
Global Government Bonds drifted lower (and yields therefore rose) on the back of better economic news, particularly in the USA. This fed through into other markets, particularly those with negative yields. This led a further fall in the value of global bonds trading at negative yields as the lure of negative yield safe havens abated. Peripheral European counties, that had seen some of the biggest yield compressions, saw spreads with Germany widen. This was most apparent with the likes of Italy and Greece.
*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.
Monthly Thought Piece – “Signals from the Markets”
Whilst most commentators are focused on the upcoming UK General Election or the latest twists and turns in the US-Chinese trade talks, our attention has been on changes that have been taking place within markets. We use a range of proprietary statistical tools to cut through the short-term noise and behaviour to help us understand the more medium- and longer-term trends and developments.
For most of the last 18 months or so, we have experienced what we have called ‘violently sideways’ equity markets, with periods of upheaval followed by months of apparent calm. This background has led to Wealth Preservation models constructed with downside protection at the heart; able to participate in rising equity markets, but conscious of the need for protection in periods of upheaval.
But this equity market background is now starting to shift, and we are seeing this across a range of our indicators. One of the areas we look at, is clusters of 20-day periods to determine what kind of market regime we are in; either ‘up’, ‘down’ or ‘flatter’. After a period of alternating Up and Down trends, a more positive pattern has appeared of late. We see this in the FTSE World Index (see below) as well as a number of regional equity markets.
The Montlake Purple Global Equity Strategy UCITS Fund uses a number of price, volatility and valuation signals to determine the level of equity exposure within the fund. These signals cover the four main global equity markets (US, UK, Europe and Japan) and are built around a sophisticated analysis of trend strength within the three signal areas and the relationship between the short term and longer-term moving average, as part of our internal Adaptive Risk Exposure System.
In recent months we have seen the signals turn positive across all four areas, so that the fund is now at its maximum equity exposure. Put simply, the signals are now giving a ‘risk-on’ signal across all four markets. The fund is designed as a downside protection focused wealth preservation fund, much like the overall satellites. Therefore the ‘risk-on’ signals are also an important indicator for the construction of the satellite as well.
The chart below shows this signal process for the S&P500 index over the last 7 years. The purple line is the ‘beta’, an amalgamation if the price, volatility and valuation signals; using a 5-day moving average. The turquoise line is the longer term 250 day moving average. When the former crosses above the latter, that is a ‘risk-on’ signal for this equity market. The signal went negative in mid-October last year, but has very recently turned positive. These signals occur only rarely, hence their significance.
We use the same series of tools to look at other asset classes. A number of these signals turned positive on longer duration bonds last year and this was one of the factors that drive the Dec 2018 rebalance in the Core where a number of bond funds were added, which then went on to be a key driver of the strong performance of the core year to date. Those positive signals remain in place, but not with the intensity that we saw this time last year.
As well as the shorter-term cluster analysis and medium term , we also have a proprietary internal Purple Capital Allocation longer term signal and this too is pointing towards a more active attitude towards risk.
If we then look at the overall picture, we see a confluence of short, medium- and longer-term signals which appear to be moving into a more ‘risk-on’ period for equity markets and the models should start to reflect this.
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.
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