Monthly portfolio summary July 2019

Travelling and arriving

July was a month dominated by the run up to a meeting of the US Federal Reserve at which it was expected that the first interest rate cut in a decade would be delivered. After counselling investors that an ‘’ounce of prevention is better than a pound of cure’’ the Chairman of the Fed, Jerome Powell, duly delivered a 0.25% cut in US interest rates at month end, supposedly giving markets exactly what they wanted. Unfortunately, investment life is rarely so simple and by underlining that this move should be seen as a ‘mid-cycle adjustment’ rather than the start of something more aggressive, he ended up disappointing investors who had been expecting something more substantial, especially in terms of future guidance. As a result, the summer party that had been underway in markets since the end of May began to fizzle out rapidly by the end of July, despite the background presence of a decent earnings season and an alleged ‘truce’ in the US- Sino trade wars.

Signal versus noise

For much of the last year the twin issues of US interest rate and trade policy have been the factors which have dominated global market sentiment and market moves. Bond markets have reacted mechanically to the prospect of falling interest rates and the resulting record low yields have continued to push investors into riskier assets in search of higher returns.

Riskier assets are in turn more sensitive to the prospects for economic growth and so tend to react quickly to the ebb and flow of news on trade relations between the planets two biggest economies. Given the rapid changes in position by the key actors in each of these areas, it is no surprise that investor expectations and market price movements often overshoot – both to the upside and the downside.

“Your portfolios are kept properly diversified and liquid”

The summer of 2019 looks like it is shaping up to be a period during which a wide range of overshoots will start to correct downwards from high starting points. Essentially this is because monetary policy on its own is simply not able to deal with the ‘event risk’ of a China-US trade war and a possible messy Brexit on top. Solid year to date returns will probably be tested again, just as they were in May, and undoubtedly the thin trading volumes of summer will act to exaggerate price movements. We prepare for these periods – which we know will come but aren’t exactly sure when – by ensuring your portfolios are kept properly diversified and liquid. From experience, these structural features help us to not only remain calm and clear sighted but also to take advantage of opportunities as they arise.

“July was another broadly solid month with portfolios returning between +0.8% and +1.6%”

Portfolio performance

July was another broadly solid month with portfolios returning between +0.8% and +1.6%. The pattern of returns was similar to June in that most equity and bond managers performed strongly given the tailwind from central bank policies for most of the month. Exceptions were in those areas with specific local issues such as the UK, where small and mid-cap equity exposures continued to struggle with Brexit related issues.

Macro managers who invest and trade in global foreign exchange and interest rate markets also found it difficult to keep up with the rapid gyrations in market pricing of interest rate expectations. Gold had a quiet month but remains the stand out performer in the quarter so far.

Saltus Investment Managers, August 2019