Cybiwealth Portfolio – Quarter 2 2019 Commentary

By Russell Collister (Chief Investment Officer, FIM Capital Limited):  Global equities have enjoyed another strong quarter. In sterling terms, the MSCI World Index rose by 5.3% to the end of June, reflecting the likelihood of impending interest rate cuts in the US and a partial end to the dispute over trade tariffs between the US and China. Returns were driven by especially good performance from the US equity market (+6.2%) whilst UK equities were again relatively disappointing (+2%), hamstrung by the interminable debate over Brexit, the race to lead the Conservative party and the outside prospect of a Corbyn-led Labour government.

Media headlines have been so relentlessly gloomy over the last few weeks and months, that the recent performance of equity markets may come as a pleasant surprise to many. This is no dead cat bounce, either. In sterling terms, global equities reached the half-year mark with a gain of 15.3%, confounding those who sold out in the dark days of December. Then, talk was of global recession, an unresolvable trade war and unsustainable company valuations. In the event, corporate results have actually been very good on the whole, bringing earnings multiples down to more realistic levels. The market rally has also been fuelled by the prospect of US interest rate cuts, the first of which will probably come as early as this month.

This is an extraordinary turnaround. A year ago, the US Federal Reserve Bank was confidently predicting a ‘dot plot’ of quarter point rises into 2020 and beyond. Back then, the world’s most important central bank was focussed on ‘normalising’ monetary policy and providing firepower in the event of another global financial catastrophe. All of this appears to have been forgotten, at least in the short term. We will never know to what extent pressure was applied to the politically neutral Fed, but it is strange that such a monetary policy U-turn should coincide with several tweets by the US President on the ‘destructive’ US central bank and, in particular, its chairman Jerome Powell.

At least the US still has a government bond market which pays a positive nominal rate of interest on its ten year bonds (for now). Germany has recently joined Japan in the illustrious ‘negative return’ club, investment in whose ten year bonds actually require payment from investors. At the same time, Austria has returned to the debt markets with a ‘century bond’ yielding just over 1.1% to maturity in 2117. Even after stripping out dividend withholding taxes, European equities yield over 2.4% with the prospect of capital and dividend growth. No wonder investors, other than the most conservative of pension funds, continue to flock to the equity markets.

One of the consequences of the market rally is that valuations in many sectors of the market are looking full. Lower rates provide some justification for this, but we think that it is unlikely that equities can sustain their current momentum going into the second half of 2019. Nor, however, do we expect a serious downturn. The political landscape is messier than we would like, but companies are, on the whole, doing well. Neither, these days, is there any sense of the unhealthy  euphoria which sometimes  accompanies stellar stock market performance. The companies that we speak to are generally extremely sober in meetings and conservative in their forecasts. Debt is low, liquidity is plentiful and balance sheets are generally strong. Hold on tight!