Monthly portfolio summary October 2019

After a volatile summer, the final quarter of the year begins well

October was another busy month that began with weak investor sentiment and nervous markets, a combination that we have become very familiar with over the last few years. However, as the weeks passed it was interesting to see how these negative factors slowly ran out of steam before reversing strongly into month-end. October is not traditionally a great month for either sentiment or returns, but this particular October may just, with hindsight, turn out to be one during which investor angst reached its peak. Although it is the job of markets and investors to assess and price uncertainty, for the last few years the potential impact of Sino-US trade wars, Brexit and the direction of interest rates has proven to be, essentially, ‘too hard’ for this to be achieved with any degree of conviction. As a result, markets have fluctuated, often violently, driven by the latest guess on how each of these factors would play out. However, as this year has progressed the overall picture has become steadily clearer, producing a marginally more positive environment for markets participants to factor into their outlooks.

“As this year has progressed the overall picture has become steadily clearer”

The first element to become clearer was the screeching U-turn in the policies of global central banks, who moved quickly from tightening to loosening monetary policy in the first quarter of the year, spooked by a collapse in market sentiment at the end of 2018. In the month just passed we have also seen considerable progress in reducing Brexit uncertainty, with the negotiation of a ‘new’ deal reducing the chances of a ‘no deal’ and providing a shot in the arm for UK risk sentiment. Across the Atlantic, the US and China also seemed to be edging towards some form of interim truce in their trade dispute, no doubt encouraged to do so by the pressure from domestic economies that have been uncomfortably sluggish whilst the bickering went on. Neither of these issues are consigned to history just yet, but a reduction in the chances of worst-case scenarios panning out proved enough to encourage the marginal seller to disappear in the first half of October and the marginal buyer to emerge in the latter half.

Short term outlook is looking more positive, longer term remains as cloudy as ever

On top of the macro events described in the previous section there was a combination of several other factors that acted to boost sentiment in October, although they could both be described more as an ‘absence of negatives’ rather than the arrival of some new unambiguous positives. For example, October was the month during which a long running stream of negative readings from economic and corporate indicators started to level out. There was no further deterioration in widely followed economic surprise indicators and the US corporate results season has, in general, resulted in more upgrades than downgrades. With global central banks already providing a strong supportive backdrop (the Federal Reserve cut US interest rates again this month) the chances of an upward swing in economic and corporate profit momentum are rising.

“The chances of an upward swing in economic and corporate profit momentum are rising”

Such inflexion points are what investors look for and, given generally defensive positioning, there is undoubtedly a considerable amount of money ready to be deployed back into active positions as more evidence arrives in support of these emerging trends. Unfortunately, however much one would like to take the last few weeks improvement in sentiment as a conclusive indicator for better times ahead, life is rarely that simple. The deeper issues of how to deliver a long lasting Sino-US trade deal, the eventual shape of a UK government, and the ‘elephant in the room’ of how the financial system deals with populism whilst servicing all time high levels of debt, all combine to complicate the longer term picture. Your manager’s job however remains refreshingly simple – we must continue to build robust portfolios for all investment scenarios, not just favourable ones. We think we are on the right side of events, with portfolios positioned well for the current choppy environment and solid returns year to date.

“We must continue to build robust portfolios for all investment scenarios, not just favourable ones”

Portfolio performance

October was overall a modestly weak month for portfolios with returns in the range of -0.5% to -1.0%, the main cause being the sharp upward movement in the pound, of around +5%. This resulted in ‘read across’ losses for those investments held in currencies other than pounds, which despite only affecting a small number of positions, still had a modest impact on returns. The positive effect of the late in the month rally in riskier assets was unable to offset the falls earlier in the month.

Gold performed well as did exposures to emerging markets, held mainly through macro managers such as Legg Mason Western Assets fund. One of the larger positions, Polar UK Absolute Equity fund, struggled with the volatility and had a poor month, partially offset by another core position UBS Currency Allocation Return Strategy fund, which benefitted from the rally in the pound and emerging market currencies.

On behalf of the Saltus Investment Committee, November 2019