Market commentary – October 2019

Global equities rose 2.7% over October in US Dollar terms as investor sentiment improved. Japanese and emerging market stocks led the way, returning 4.9% and 4.2% respectively. The UK was the main laggard, falling 2.1% on sterling strength. At the sector level, health care and technology companies outperformed, while energy stocks declined 2.3%, despite a flat oil price.

With the exception of US Treasuries, major government bond yields were broadly higher, resulting in negative returns. Credit spreads tightened in the investment grade and hard currency emerging market debt spaces, but widened in high yield. Stronger emerging market currencies drove local currency debt higher. Sterling appreciated significantly against other major currencies and the price of gold rose 2.8% over the month.

October saw easing in US-China trade rhetoric, helping more cyclically sensitive stock markets to outperform. The two countries appear to be converging on a “Phase one” deal to pause tariff escalations, reduce the trade deficit and begin addressing other issues. Any cessation of hostilities and the potential for some rollback of prior actions gives hope of a bounce in the manufacturing sector.

Further twists and turns in the Brexit tale took the UK to the brink of a deal to leave the EU. However, the UK parliament continued to have concerns over the possibility of a no-deal exit and the time available to scrutinise the offer, resulting in a further extension to the exit date. Parliament eventually moved to call for a general election in December in an effort to break the political deadlock. Indications that the probability of a no-deal exit was diminishing were enough to send sterling up sharply and help the euro climb versus other major currencies.

Economic data remained poor but offered some signs of stabilisation in the ongoing global growth slump. Mario Draghi’s last meeting as President of the European Central Bank (ECB) passed without change, although he continued his calls for greater action from governments through fiscal policy. The US Federal Reserve (Fed) cut interest rates again but indicated that it feels it may have done enough for the time being.

 

Performance and activity

Over October the fund’s Net Asset Value (NAV) fell 1.9%, the share price fell 2.2%, and the Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned -1.6% in share price terms (source: Morningstar). The FTSE World Total Return Index, which the Company aims to outperform over the long-term, returned -2.2% in sterling terms.  The Company’s NAV is up 0.8% for the year at end September 2019.

The only sector positive during the month was property with positive returns coming from Urgan Logistics REIT PLC, Summit Properties Ltd and CEIBA Investments Ltd.  The sector contributed 0.3% to performance.

The Public Equity sector was flat during the period with gains from Sigma Capital Group PLC and Burford Capital Ltd offset by losses from New Energy Solar Ltd.

The main losses during the month were focused in the Private Equity and Credit sectors.  Private Equity detracted 1.3% from performance.  The sector was impacted by the allocation to foreign currencies with currency exposure detracting 0.9%.  The other main detractor was from the continued underperformance of Riverstone Energy Ltd (“Riverstone”).  Riverstone continues to operate in an unloved sector.  The onshore oil and gas industry in the US has come under greater scrutiny from investors wishing to see positive free cash flow rather than purely growth in production.  Access to capital within the sector is becoming more difficult and many stocks trade at historical lows.  Riverstone has been further impacted by a significant widening of its discount which now stands at roughly 40%.  We note in the interim management statement that the Board of Riverstone are in discussion with the management team over the investment management agreement and hope to see activity that supports the share price and closes the discount.

Within the Credit sector we again have significant non sterling exposure.  This was the main cause of the -0.5% contribution to performance from the sector.

Glossary

Fiscal policy: Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.

Yield: The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.

References to any specific security or company is for informational purposes only and should not be construed as a recommendation to buy or sell any security.