Monthly portfolio summary January 2020

Late month reversal of sentiment

The combination of a reduction in geopolitical risks and aggressive support from the world’s central banks proved a powerful tailwind for markets in the final quarter of 2019 and that positive momentum carried on into the early part of the new year without much of a pause. However, it wasn’t long before this new optimism was tested by an escalation of tensions in the Middle East, brought about by the latest flare up between the US and Iran. Ultimately, global markets guessed correctly on a muted Iranian response to the assassination of one of their generals and the issue quickly retreated from the front of investor minds.

“Positive momentum of the final quarter of 2019 carried on into the early part of the new year without much of a pause”

The second test for positive sentiment has proven not so easy to dismiss and in the end was enough of a concern to prompt a sharp risk-off move in markets late in the month. The issue of the coronavirus infection in China was initially downplayed by the Chinese government, before the seriousness of its potential impact prompted a large scale and aggressive policy response. Travel restrictions, speedy infection rates and a long incubation period meant there was, and still is, an unusual degree of uncertainty about how negative this issue could be for the global economy. At the time of writing we still don’t know the answer to that question, with the resulting uncertainty having predictably negative effects on riskier assets. Economically sensitive commodity markets fell -8.8% in the last week of January, with stock markets following a day or two later to end the month in negative territory (e.g. UK equities down -3.2% for the month as a whole). As could be expected, traditional safe-haven assets rallied in response to the outbreak with, for example, gold up +4% in the same time period. Perhaps the most notable performance came from government bond markets, where the flight to safety dynamic helped yields fall in the UK and US to within a whisker of all-time lows.

Forecast is cloudy near term with sunny spells likely later

Although we could not have predicted a viral epidemic as the cause of a market retreat, it is true to say that given such extended starting point coming into the year, some form of sell off was to be expected, even welcome. Taking previous similar episodes in the recent past (e.g. SARS in 2002) the bottom in risk assets tends to come around the time that the number of new infections peaks.

“Given such extended starting point coming into the year, some form of sell off was to be expected, even welcome”

We don’t know when that will be, but we are fairly certain that part of the ongoing policy response will be to take stimulative action to offset the impact of restrictions on economic activity. This should help economies recover later in the year but will leave investors with an uncomfortable gap during which long awaited international economic momentum will probably not materialize. The validation of strong market performance of 2019 by strong profit growth in 2020 could have a question mark over it if the coronavirus outbreak is not contained quickly and until we see evidence of infection rates peaking, we doubt that the volatility is over. However, at the same time we would also note that the earnings season in the US and Europe is off to a very solid start, especially in the USA. In addition, the oil price is down -20% from its peak earlier in the month, a move that is undoubtedly a boost for activity in developed markets which make up the bulk of world demand.

“We would expect a choppy period for markets in the early part of the year before the stimulus already in the pipeline acts to underpin sentiment and portfolio returns in the latter part of the year”

Putting it all together, we would expect a choppy period for markets in the early part of the year before the stimulus already in the pipeline (plus some more to come) acts to underpin sentiment and portfolio returns in the latter part of the year.

Portfolio performance

Overall a positive month for portfolios with returns in the range of +0.2% to +0.6% depending on risk mandate. This was a pleasing result in an otherwise negative month for most assets, with the returns coming from a combination of holdings in safe-haven assets (gold, government bonds) and outperformance by equity managers.

The equity managers that did best included those that employ some form of hedging to reduce their directional dependence, with Artemis US Extended Alpha fund probably being the best example. Similarly, those funds that hold more traditionally defensive equity investments, such as Lazard Global Listed Infrastructure, performed well as risk appetite wobbled.

On behalf of the Saltus Investment Committee, February 2020