Investment Views

15.11.2019
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November 2019

Here we summarise our Investment Committee's immediate outlook for the primary asset classes and major equity markets.

Investment Views for Nov 2019

  • Positive
  • Neutral
  • Negative
Asset Class Current View Outlook
Equities

The global economic outlook remains uncertain. Recent data shows some signs of stabilisation although these have largely centred on emerging economies outside China, whereas growth in advanced economies could take a further step downwards as the weakness in manufacturing spreads to the services sector. Consumer spending remains strong and this has become the primary support for the global economy, given the low levels of business and government spending. The labour markets are beginning to show signs of weakening and this could lead to reduced consumer confidence and in time reduced spending. Business confidence continues to fall, although the word ‘recession’ has figured less frequently in the media of late and so we could be in for a period of tepid growth. With looser monetary policy proving to be increasingly ineffective there are increasing calls for some form of fiscal boost by governments, but this is not guaranteed given the current political landscape. We continue to favour equities on a relative basis but expect limited upside in the short term.

Fixed Interest

We live in unusual times with about $17 trillion, or one quarter of the world’s bonds currently ‘paying’ a negative yield, which means that investors purchasing such bonds today and holding them to maturity are virtually guaranteed to lose money. This begs the question: should highly rated sovereign bonds continue to be termed ‘risk-free’ assets? Nevertheless, bonds continue to have a place within multi-asset portfolios to provide diversification and a valuable negative correlation to equities in times of distress. Our predominant exposure in the fixed interest sector is through credit (corporate bonds) where yields are generally higher, using active managers who endeavour to make positive returns by seeking out opportunities thrown up by current conditions. More government borrowing should lead to higher bond yields but very low interest rates and what is happening on the global stage should limit how high they can go.

Property

The returns from UK commercial property are expected to remain weak as property rental value growth is dragged down by declines in retail rents. In the short term, property yields could rise further given the ongoing Brexit uncertainty and the outlook for the retail sector. But with government bond yields expected to stay low and tepid economic growth, the yields from the office and industrial sectors are likely to be static at best. Listed property securities have enjoyed a very good 2019, and the sectors that have outperformed are those where total returns are generally driven by earnings growth and price appreciation rather than yield. We continue to retain some exposure to global property securities, but this is limited given the weakness in the economic growth outlook and geopolitical risks. We remain cautious, other than on a long-term basis.

Alternatives

Industrial commodities – most metal prices are expected to remain subdued as global growth remains weak and the Chinese economy continues to slow.

Oil – although prices will fluctuate on supply and inventory data, we expect prices to trade within a fairly narrow range around current price levels given reduced demand as the global economy slows.

Gold – periodic bouts of investor uncertainty will see demand for gold’s safe-haven qualities. A softer dollar, given the expectation of a decrease in US interest rates and low bond yields, should also be supportive. However, with strengthening hopes of avoiding a global recession gold’s recent rally may have temporarily runs its course.

Absolute return – offers the potential to dampen volatility and provide some downside protection, but returns are often moderate at best.

Cash

With UK interest rates seemingly on hold and the huge uncertainty created by Brexit, it is unlikely that yield-hungry depositors will be satisfied in the short-term. Consequently, cash currently serves only as a diversifier, helping to reduce portfolio risk by dampening volatility.

Equity Region Current View Outlook
UK

Recent (significant) strengthening of the pound in response to optimism that at last a Brexit deal may become a reality has reversed some of the trends seen for much of 2019. The share prices of UK small and medium-sized companies have shown some recovery, especially those that are domestic-economy focused. In contrast, UK-listed global businesses have seen their share prices suffer. Although the outcome of the forthcoming general election may finally provide some direction on Brexit, the markets may have to cope with either a relatively hard Brexit but business-friendly policies under a Conservative government or a relatively soft Brexit and business-unfriendly policies under Labour. A hung parliament will only prolong the current uncertainty. These choices are likely to limit the upside for equities and the pound in the short term and our positioning is diversified to cover most eventualities.

US

Despite weakness in manufacturing and some indications of a spill-over to the services sector, there are diminishing signs that a recession is imminent as the economy continues to be supported by consumer spending. For now, employment numbers remain relatively buoyant helping to support consumer confidence; but if corporate earnings figures disappoint and employers start to shed staff, confidence will soon erode damaging consumer spending which accounts for two-thirds of US economic activity. With the trade war unlikely to be settled any time soon, even further interest rate cuts may be insufficient to provide much upside for the markets in the short term.

Europe

Economic growth is likely to remain anaemic. Germany is skating with recession and Italy’s economy is likely to flatline. Core inflation seems to be stuck adrift from the ECB’s current target, even after the recent stimulus package, and so there may be some pressure to apply further stimulus. Survey data, especially for the manufacturing sector, paints a poor outlook and business sentiment surveys point to falling capital expenditure intentions. Although consumer confidence has been high it is showing signs of slowing, as has employment growth. We expect increasing calls for some form of fiscal policy stimulus, but political pressures may delay the timing and extent of any boost from this direction.

Japan

Despite reasonably buoyant equity markets of late, the economy continues to contract as manufacturing deteriorates, not least because of the wider global slowdown in growth hitting Japan’s exports, and consumer spending falls reflecting the impact of the recent sales tax hike. Whilst the Bank of Japan is expected to remain supportive, there are mounting concerns over the impact of loose monetary policy on financial stability. We continue to favour domestic-oriented growth companies seeking to tap into Japan’s long-term change to its economic and social structure, and whilst Japanese stocks have rarely been cheaper, the time horizon is such that we maintain our neutral stance.

Asia Pacific and Emerging Markets

The resilience of the Chinese economy in 2019 is largely down to the strength of construction activity which has been buoyant whilst industrial production has weakened. However, this is unlikely to last, and we expect further policy support to try and stabilise the economy. Growth in the rest of emerging Asia may have bottomed, helped by a combination of looser fiscal and monetary policy and a recovery in the electronics sector, but is expected to remain weak. Economic recovery in Latin America is expected to be soft, monetary policy is expected to remain loose and further stimulus is likely.

Risk warning: Investors should be aware that past performance of investments is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them may fall as well as rise. The content of this bulletin is for general information and reflects the general market view of Parallel Investment Management Ltd. - it should not be interpreted as recommendations or advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content.

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