In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.
Our assumption that markets were overpricing risks of a recession during the December correction led us to start the year being overweight equities, as we had not cut our equity allocation despite the high level of market stress. This proved to be rewarding as the strong rebound observed in the first four months of 2019 contributed to the strong performance of the portfolios, especially with bond markets also rallying.
We took advantage of the strong rise of equity markets to reduce our equity allocation significantly from overweight to underweight, reflecting our cautious outlook in view of the rising level of uncertainty. Whilst we had not expected government bond yields to climb much, the year-to-date collapse of yields has been a big surprise and a major contributor to the strong returns of fixed-income exposures
Our CIO, Nigel Turner, took the stage to accept our award, as one of the TOP 50 players in the Swiss wealth management space at Citywire Swiss Wealth ceremony in Basel.
The four-month rally of global equity markets came to a screeching halt in May. The early-year optimism over a trade deal between China and the U.S. gave way to concerns over a major breakdown of trade talks and growing fears of an economic slowdown. The prices of risky assets depreciated across the board; the MSCI World Index in local currencies fell by 6%, the spreads of credit and emerging market debt widened and commodity prices weakened, with oil down by 16%. Significant flows into safe-haven assets contributed to strong returns for high-quality sovereign debt, gold and defensive currencies such as the yen and the Swiss franc. The yield of the 10-year U.S. Treasury note declined by 0.38% to 2.10%, its lowest level since September 2017, while the yield on 10-year Bunds reached an all-time low of - 0.21%.
The rebound of global equity markets was extended in April with European stocks outperforming and U.S. indices reaching new records. The MSCI World Index in local currencies gained 3.6% during the month to bring its year-to-date performance to 16%; growth stocks outperformed value ones, with the technology sector faring the best, on the back of well-received first quarter earnings. The strong demand for risky assets was also reflected by tighter credit spreads and by the weakness of the Swiss franc, which depreciated by 2.4% against the euro and the U.S. dollar. The rally of G-7 sovereign debt came to a halt as yields moved higher, even if this rise remained modest when compared to the plunge of yields over the last quarters.
The first quarter has ended with a well above-average quarterly gain for global equity markets, a significant contraction of credit and EM debt spreads and a plunge of sovereign debt yields. It has also seen the main central banks turn increasingly dovish in the light of growth slowdown concerns and a lack of inflation pressures. Following a 13.5% correction during last year’s fourth quarter, the MSCI World Index in local currencies has made up most of its losses thanks to a 12% year-to-date rebound. Credit spreads have also fared well, with those of U.S. and European high yield bonds tightening by 1.35% and 1.09% respectively.
The positive trend for risk assets observed since the beginning of the year extended throughout February. The MSCI World Index in local currencies gained another 3.2%, bringing the year-to-date performance up to 11%. The spreads of credit and emerging market debt also continued to contract, with high-yield bonds now having erased most of their losses of November and December. Logically, the more defensive assets such as government debt and gold ended the month on a weaker note, with yields moving higher and the price of gold dropping back to its end 2018 level. The major currency crosses evolved within tight ranges to remain little changed so far this year.
What a difference a month makes! For investors gripped by fear during the manic month of December, January provided a much-needed relief rally of risk assets. Global equity markets had their best month since October 2015, with a 7.7% gain for the MSCI World Index, and credit spreads dropped back to end-November levels, or even lower. Commodity prices also rebounded, lead by oil and industrious metals. In foreign-exchange markets, emerging markets and commodity-related currencies performed the best. In this environment, it is also worth noting the positive performance of more defensive assets, including government debt and gold.
Citywire’s ‘Top50 Independent Asset Managers’ looks at some of Switzerland’s largest independent wealth managers, which manage combined client assets in excess of CHF 130 billion. Undoubtedly, to emerge as one of the top players in the field is a challenge.
Global financial markets were affected badly by the geopolitical landscape
In the wake of the unusually smooth financial markets observed in 2017, the past year has been a quite dramatic wake-up call for investors. Early-year euphoria in equity markets gave way to rising anxiety, due not only to economic and political issues, but also to extreme market behaviour.
If the U.S. economy was by far the brightest spot, reflected by outstanding corporate profits, a deceleration of growth was observed across other regions, in China and Europe in particular. This weaker economic trend was compounded by the escalating impact of the trade war led by Donald Trump on the rest of the world, with China being his main target. Financial markets were also affected by a number of political uncertainties which proved to be more detrimental than was the case during the previous years; the resolution of some of these issues are among the key factors for an improvement of the fragile sentiment currently prevailing in the markets.
November was another volatile month for equity markets as they experienced big swings in the wake of the October rout. They did manage to post positive monthly returns across most regions, nevertheless, with EM equities faring the best. It was another tough month for some big U.S. names such as Apple and Facebook, which were down by 18% and 7% respectively. Within other asset classes, government bonds saw their yields decline, high yield spreads widened significantly whereas the price of oil dropped by 22%. The major currencies ended the month relatively unchanged as did the price of gold.
October lived up to its reputation of being a volatile month for equity markets reflected by the 7.9% drop of the MSCI World Index, in local currency terms. The rout was widespread as stock markets across the world were hit by fears over slowing growth, trade wars and higher interest rates. For once, American equities failed to offer any additional resistance than the other markets and a number of technology favourites, such as Amazon and Netflix, suffered from heavy selling. The fall of the equity market showed a lot of similarity to the one that took place in late January/early February; equities suddenly dived following a period of fast rising Treasury yields whereas safe haven assets did not benefit that much from the sell off; 10-year Treasury yields ended the month 8bps higher and the price of gold appreciated by less than 2%.
Global equity markets ended September with modest gains following a weak start to the month. For once, Japanese equities were the outperformers while emerging market equities showed some signs of stabilisation, even if ending the month a little lower. A higher appetite for risk was reflected by the rise of the safest sovereign debt yields and a tightening of spreads for high-yield and emerging market bonds (- 38bps on the J.P. Morgan EMBI Global Spread Index). As to be expected in such a context, the Swiss franc and the Japanese yen depreciated against other major currencies.
In the last issue of Citywire magazine, our fund manager Mikhail Myakishev shares with you his point of view on Asian equities.
Asian equities play an important diversification role within our emerging market exposure, because the region has historically been a strong performance contributor, despite occasional periods of high volatility.
August was a mixed month for global equity markets as the MSCI World Local Currency Index’s 1.1% gain was only the result of higher U.S. equity prices; in contrast, the Euro Stoxx 50 Index lost 3.8%, the Topix 1% and the MSCI EM Index 2.9%, in dollar terms, due to concerns about the ongoing trade dispute and the stress in emerging markets. This higher aversion to risk was also reflected by the significant strength of the Swiss franc, which appreciated by 2.9% against the euro, and by lower yields on U.S. Treasuries and Bunds. Emerging market bonds were badly impacted by EM currency weakness, with the J.P. Morgan EMBI Global Spread Index widening by 46bps to 400bps.