The Multi-Asset Process

March 2019 Market Review

March extended the solid run for most markets so far in 2019 although familiar macro concerns continue to linger and fears are rising about possible global slowdown.

After months of negotiation between the US and China, the situation appears to rest of a matter of trust. While President Trump continues to tease markets with his “nearly there” and “coming along nicely”, he also let slip his administration intends to leave tariffs in place for a substantial period to ensure “China lives by the deal”.

The US had threatened to raise import duties on Chinese goods from 10% to 25% on 1 March and delaying this was taken as a major positive by a market keen to see this situation resolved. Talks reconvened in Beijing at the end of the month but there is a suggestion any major summit could be pushed back until later in the year.

When that date is announced, it will be a major signal. The Chinese want a signing ceremony and will be on their guard against the kind of ‘negotiation’ we saw with North Korea’s Kim Jong-un, which became an exercise in typical Trumpean machismo.

Meanwhile, it was a busy month on the interest rate front although it was more about what central banks ruled out than what they actually did. After its December hike – in retrospect, a possible shot across the bows of the surging FAANGs (Facebook, Amazon, Apple, Netflix and Google) – the Federal Reserve has about turned and becomes more dovish by the day. Just weeks after the market was expecting at least two rate hikes this year, that now seems off the table and some commentators are speculating we may even see a cut in 2019.

Some measure of unintended consequence seems to be at play here however. Before the Fed made its March policy announcement, consensus had settled on a ‘patient central bank leading to renewed growth’ narrative, supported by a solid jobs market and businesses continuing to benefit from Trump’s tax cuts. But Fed chair Jerome Powell’s over-dovish comments seemed to spook markets rather than reassure them. While he reiterated the bank’s patience and cautious stance on balance sheet unwinding, Powell also slashed growth forecasts and voiced concerns about unemployment. Rather than the flexible friend to the market image the Fed has been trying to cultivate, this was taken to reveal a central bank with serious concerns about growth.

Echoing the dovish trend, European Central Bank (ECB) chair Mario Draghi also announced he is willing to delay rate hikes for as long as necessary, as growth projections for the region were downgraded further to 1.1% this year, from a December forecast of 1.7%.

This central bank activity is an obvious factor behind the strong bond rally so far this year, with yields falling and $1.6tn added to the value of the global fixed interest universe in March alone. As stated, the scope of the Fed’s U-turn has sent many investors rushing for the perceived safety of government bonds and triggered hedging by mortgage investors fearful of a wave of refinancing.

In the UK, the Bank of England (BoE) also kept rates on hold, although with the Fed and ECB both committed to keeping their hiking powder dry, the Monetary Policy Committee is the only major developed market bank where rises are even in the lexicon at present. Of course, Brexit uncertainty was at the heart of the BoE decision and this elephant remains firmly in the room, making the UK a laughing stock globally as the supposed iron-clad exit date of 29 March passed without resolution.

No one needs us to recount all the machinations over the month, suffice it to say the Government has proved unable to find a workable solution in more than a thousand days since the vote. Theresa May managed to table a third ‘meaningful vote’ on her withdrawal plan on 29 March – the irony of that date cannot have been lost on anyone – but that failed to pass despite the Prime Minister offering up her own scalp.

As things stand, this latest failure means Mrs May must go back to Brussels before 12 April to set out an alternative plan but with the situation changing by the hour, nothing is certain and the clamour for a second referendum continues to rise.

We have always stressed that Brexit is something of a red herring when it comes to diversified portfolios as the UK makes up just over 3% of the global economy and around 6.5% of the stock market. Saying that however, most people in the country are increasingly desperate for some kind of resolution, at least so we can all think about something else.

We made some tactical shifts on certain portfolios during March, moving to take advantage of a number of opportunities. As we have noted over recent months, the number of FTSE 100 companies with a dividend in excess of 5% has reached historic highs and we are looking to capture that via an income-focused portfolio. In the US, we remain wary of valuations after such a strong run and while still positive on the small-cap story, believe the current FAANG-dominated growth has unwelcome echoes of the late 1990s technology bubble.

On the bond side, we have been broadly split between UK and global exposure but feel that as Brexit moves – albeit at glacial pace – towards resolution, gilt yields are likely to rise. With that in mind, we have increased our tilt towards global index-linked exposure.

Looking to the rest of 2019, we have long said the global economy has entered the latter stages of the cycle but still see little obvious sign of severe slowdown ahead. Recessions tend to come from excess, whether in the economy or financial markets, and it is difficult to find too much of that at present. For me, that would suggest any slowdown is likely to be fairly shallow.

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Monday, April 8, 2019, 8:35 AM