The Multi-Asset Process

February 2019 Market Review

February was another solid month for markets and saw progress on two lingering issues that have been behind much of the recent volatility, with the Federal Reserve further blunting any hawkish tendencies and long-awaited forward momentum on trade talks.

Geopolitics raised its head as February ended, however, with renewed hostilities between India and Pakistan in Kashmir and an unsuccessful summit between the US and North Korea weighing on sentiment.

On the trade front, talks between the two giant economies appeared successful, with the deadline for imposing further tariffs on Chinese goods extended and a summit planned at the Mar-a-Lago resort in Florida. As has become the norm in today’s febrile environment, this was not without an element of farce, however, as Trump argued with his chief negotiator during a televised trade meeting over the legal status of a memoranda of understanding.

As for the Fed, minutes from the most recent Federal Open Market Committee (FOMC) meeting highlight its current position as a flexible, patient friend to the market, with both words peppered through the statement. While the Bank will continue to shrink its balance sheet, it also stated a new ‘openness’ to adjust any of the details of this if economic or financial conditions warrant it. Given the January U-turn on rate rises, monetary policy looks likely to remain accommodative and market friendly for a good while to come.

While we saw some progress on trade and policy tightening concerns, the usual Brexit-shaped elephant remains firmly in the room – with the situation muddied further by the founding of the Independent Group of disaffected Labour and Conservative MPs. While not an official political party at this stage, it remains to be seen what this group might achieve as the leadership of both major parties seem incapable of winning widespread support.

There are obvious similarities to the breakaway of the Social Democratic Party (SDP) in the early 1980s and many have highlighted the ultimate failure of that enterprise. But we have rarely seen a period of so much political upheaval and no one can predict what impact any kind of fresh option might have on the overall picture.

In terms of actual Brexit developments over the month, Theresa May once again postponed a final vote on her Brexit agreement, setting a new deadline of 12 March. Bowing to pressure to make it clear what happens if she suffers the latest in the long line of defeats, the PM outlined that MPs would vote on a no-deal Brexit on 13 March if she loses the next Meaningful Vote. If MPs reject a no-deal Brexit – which close to 80% are estimated to be against – they will vote on 14 March on a short extension of Article 50 until June.

Markets and sterling rose on this news but as Bank of England governor Mark Carney commented, simply pushing the decision back is clearly not as good for the economy as actually reaching a deal.

“There’s a big difference between an extension of Article 50, even a long extension, and an agreement with a transition to a known end stage,” he added. “Wherever we’re headed, it would serve the economy well to have a transition period to that new world, so people knew soon where they’re headed, businesses could reorganise their affairs and get ready for this new world, and government could finish its tasks.”

As we have written since the vote in 2016, we end another month without resolution and it is impossible to know what damage 980 days (and counting) of squabbling, blatant careerism and simple old-fashioned ineptitude has done to the country and faith in the political process, whatever arrangement eventually emerges.  

At present, with so much opposition to a no-deal, the options appear to have coalesced around Theresa May’s revised deal, another referendum or remaining in the EU. But with significant opposition to all three, we can only wait and see.

We continue to stress the line we have held throughout: the most prudent approach to managing portfolios in periods of heightened volatility is a process and philosophy that puts risk first, embraces diversification and ultimately remains focused on the long term. This is how we manage target risk portfolios and this will not change as a result of any kind of Brexit.

We also stress the fact that our portfolios are globally diversified and not dependent on the success (or otherwise) of the UK economy. Our portfolios are more tied into the global economy, of which the UK makes up just over 3% (and around 6.5% of the global stock market), so Brexit – however it plays out – is unlikely to be a significant driver.

To date, the ebb and flow of our future relationship with Europe has mainly been seen through the strength or weakness of the pound as well as gilt yields. Weakness in the pound has clearly supported UK companies, typically those listed on the FTSE 100, with significant overseas earnings. Of course, currency movements can work for or against us, and we are not attempting to predict these notoriously unpredictable markets.

As a result of this and other factors, the number of UK companies with a dividend in excess of 5 per cent has reached historic highs. To allocators of capital, this is an attractive value opportunity but, in global terms, there are many others, particularly following the stock market declines of the fourth quarter, and we will continue to look to buy our favoured areas as cheaply as possible. We continue to underweight US and UK large caps in our portfolios, preferring Asia and emerging markets as well as Europe and Japan.

For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Monday, March 11, 2019, 10:22 AM