Monthly portfolio summary December 2019

Year of the politician ends positively

Another fascinating, complex year came to a close in December with a broad based ‘relief’ rally across global markets, mirroring what happened at the start of the year and going a long way towards erasing the memory of an awful 2018. The driver this time was a reduction in geopolitical risk as a ‘stonking’ Conservative victory in the UK removed the prospect of a Corbyn government and provided some interim certainty over Brexit policy.

“Another fascinating, complex year came to a close in December with a broad based ‘relief’ rally across global markets”

Simultaneously, a heavily trailed rapprochement in Sino-US trade talks allowed a ‘Phase 1’ deal to be agreed and ushered in another period of interim certainty on an issue which had been vexing markets for the best part of two years. The combination of events was a nice Christmas present for investors and cash was put to work in thinly traded holiday markets, driving the prices of nearly all investments higher for the month, quarter and year as a whole.

The ability of politicians to move markets in the final months of 2019 was in stark contrast to the beginning of the year, when central banks were left on their own to deal with collapsing global investor sentiment. Led by the Federal Reserve they reacted aggressively to end the era of modest interest rate rises and begin another one of interest rate cuts. By the final quarter of 2019, an aggregate of 32 interest rate cuts around the world had underpinned the economic outlook enough to allow investors to breathe again. Consensus opinion shifted to assume that the business cycle was probably not going to end with a horrible recession and instead might just be able to expand again.

“Consensus opinion shifted to assume that the business cycle was probably not going to end with a horrible recession and instead might just be able to expand again”

This shift in opinion prompted some vicious intra-market rotations between defensive and cyclical sectors, catching many an active manager by surprise, but it also laid the groundwork for the December resolution of the two big geopolitical risks to rally sentiment and push markets to new highs.

Still desperately seeking validation

As could be expected there are several ‘buts’ to temper all this good news, though we do think they end up moderating the outlook from here rather than de-railing it. The most obvious ‘but’ is that although economic growth has stopped slowing down, it has still not started reaccelerating and it will definitely need to do that in order to validate the price moves we have seen, especially in riskier assets.

“There are several ‘buts’ to temper all this good news, though we do think they end up moderating the outlook from here rather than de-railing it”

Politically, although event risk has fallen sharply it hasn’t gone away, retaining the very real potential to disrupt markets in often unpredictable ways. For example, although the UK now has a majority government which can implement policy, we also have a real risk of exiting the EU without a deal at the end of 2020, something which would quickly reverse many of the recent stock market gains.

Similarly, the truce in Sino-US trade talks is not a final settlement and the whole issue has the hallmarks of a deep, long term power struggle which will hover over markets for some time to come. The forthcoming US presidential elections will also no doubt prove to be a ready source of volatility throughout the year as will the worsening situation in the Middle East. Although the above observations do temper the outlook somewhat, the scope for central banks to provide aggressive policy support is still very large, given the ongoing absence of inflation pressures globally. The provision of cheap money is still proving to be the most effective tool for extending an ageing business cycle and having the ability to provide further support is a significant risk mitigator for the year ahead. Putting it all together, the most likely investment environment that comes out of the hotch potch of influences described above is one where growth inflation and interest rates remain low for a long time, ushering in a period of low but positive returns for your portfolios.

“Time will tell but we can at least begin 2020 with some grounds for optimism”

If we can navigate the inevitable bouts of volatility and invest alongside managers skilful enough to exploit opportunities as they arise, then we could hope to improve on that central case. Time will tell but we can at least begin 2020 with some grounds for optimism.

Portfolio performance

Overall a positive month for portfolios with returns in the range of +1.3% to +2.9% depending on risk mandate. Unsurprisingly it was the equity portions of the portfolio that performed best, with UK exposed managers benefitting from the election results and more global managers enjoying the year end revival in risk appetite.

Gold and alternatives managers also performed well, with UBS currency fund and Legg Mason Western Assets Macro fund picking up gains from emerging market exposures.

The pound rallied several percent, again on the election outcome, which dampened returns in some overseas holdings, mainly for those mandates that hold dollar and euro private equity positions.

On behalf of the Saltus Investment Committee, January 2020