Monthly portfolio summary September 2019

A volatile quarter ends noisily

September was another busy month, ending a third quarter of wildly oscillating investor sentiment and whipsawing asset prices. Equity markets witnessed some violent gyrations during the quarter, as different sectors and styles vied for market leadership, whilst bond markets steadily powered ahead, fuelled by interest rate cuts and a general increase in risk aversion. This split in the performance of riskier and safer assets was also starkly evident within the commodity sector, where ‘safe haven’ gold moved up another +4.5% over the summer, whilst the oil price fell -7.5%, despite the removal of 5% of world capacity by a drone attack in Saudi Arabia. The root cause of these movements can be traced back to the ebb and flow of worries over the global economy, which has been slowing down for some time (but not stopping). Central banks and many governments have responded to this sluggishness with multiple interest rate cuts and increased spending in an effort to ensure that this slowdown in activity doesn’t morph into a more dangerous contraction. Despite the aggressive moves in the past there is still considerable room for these measures to accelerate again if needed. China, Europe and many Emerging Market nations have considerable capacity to increase government spending and there is also clearly further scope for cutting interest rates in the USA and UK.

“Despite the aggressive moves in the past there is still considerable room for these measures to accelerate again if needed”

On its own we would usually think that these combined actions (and potential actions) would be enough to underpin a much more optimistic outlook than there currently is, but the unfortunate reality is that the geopolitical situation is too volatile and complicated to allow that to happen. Ongoing geopolitical squabbling has fed directly into the highest ever level of confusion over economic policy, sapping corporate confidence and fuelling market volatility.

Market movements underline the current high degree of uncertainty

This uncertainty is a global phenomenon, with the more obvious US-China trade dispute and UK-EU Brexit process being supplemented with rising political and military stress

in the Middle East. Of all these issues it is undoubtedly the US–China dispute that is having the most impact. Nearly two years of threat and counter threat have had a corrosive effect on corporate confidence, leading to investment plans being deferred, international trade slowing and manufacturing activity contracting. The global economy is currently overly reliant on the single engine of a resilient US consumer and the longer this trade dispute carries on unresolved, the more likely it is that this engine could run out of fuel. This results in a near term outlook that is tough to call with any conviction, although that isn’t necessarily bad news for your portfolios – especially as your managers are well aware that being patient is usually the best way of generating long term performance.

There are plenty of smaller ideas for investing just now but no compelling large ones, so with a reasonable year to date return we are happy not to ‘force the scoreboard’ at this point. Given the number of potential market moving data points before year end, we have little doubt that opportunities will present themselves and that a little patience now, should lead to performance later on.

“There are plenty of smaller ideas for investing just now but no compelling large ones”

Portfolio performance

September was overall a modestly weak month for portfolios with returns in the range of -1.35% to -0.64%, bringing quarterly performance in the range of +0.3% to+1%. The weaker tone was driven by a combination of aggressive profit taking in positions that had previously performed well, such as gold and US dollar holdings. Some of the better performing credit managers also retreated a little on profit taking. One position, Polar UK Absolute Equity had a very weak month, falling nearly -12% as overly large exposures to previous winning positions (e.g. gold mining shares) aggressively pulled back on profit taking. Since then the performance has stabilized and improved, as the manager acted quickly to adjust exposures. At the portfolio level these moves did take a little bit of the shine off the previous month’s resilience, but we remain overall happy with your broad exposures which have coped well with a volatile external environment during the quarter and year to date.

Saltus Investment Managers, October 2019