Market commentary – March 2019
Unless otherwise stated, returns are MSCI Indices expressed in local currency terms. The return for the UK equity market uses the FTSE All Share Index in local currency terms.
Equity markets continued their strong start to the year as the MSCI World Index delivered 1.3% in US dollar terms and 3.4% for sterling investors over March. The UK was the leading major equity market, with Japan the laggard and within emerging markets, China was the standout country.
Major 10-year sovereign bond yields fell by around 0.25-0.3%, sending German 10-year bunds into negative territory for the first time since 2016. Investment grade bonds outperformed high yield debt as the fall in government yields boosted higher rated bonds more. Falling currencies held back emerging market local currency bonds but hard currency equivalents delivered another strong month. Among major currencies, the Japanese yen and US dollar performed best.
March saw further dovishness from central banks amid a slew of less positive economic data and weakening inflation. The Federal Reserve (Fed) changed its guidance on future interest rates to indicate no further increases in 2019 and only one in 2020. In addition, it was announced that the process of selling US Treasuries and mortgage-backed securities would end this year. The European Central Bank (ECB) also moved to delay increasing interest rates and announced that it was planning another round of support for European banks. Sovereign bond yields moved lower, resulting in one measure of the US yield curve steepness inverting, often viewed as a sign of an upcoming US recession.
The eagerly anticipated annual meeting of the Chinese National People’s Congress saw the growth target lowered to a range of 6-6.5% with US-China trade tensions mentioned as a factor. However, a raft of stimulus measures were announced, maintaining hope that China can boost global economic growth at a time of slowing activity in the developed world.
Brexit remained a source of headlines as UK Prime Minister Theresa May failed to gain a majority for her agreement with the European Union. Members of Parliament held a series of votes on alternative proposals, although none of these managed to find a majority either.
Performance and activity
Over the month of March the fund’s Net Asset Value (NAV) gained 2.0% whilst the share price return was -3.9%. Over the same period the Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned 0.3% in share price terms (Source:Morningstar). The FTSE World Index, which the Company aims to outperform over the long-term, returned 3.0%. A relative underperformance of 6.9% in share price terms (Source:Bloomberg) and -1.0% in NAV terms.
The best performing sector during the period was the private equity sector. Our holding in the limited partnership vehicle Renewable Energy & Environmental Infrastructure Fund II contributed the majority of this return. Renewable Energy & Environmental Infrastructure Fund II sold a position at a premium to carrying value. This provided an uplift to its net asset value which contributed 0.9% of the return from the sector.
The hedge fund sector generated positive returns. Sagil Latin American Opportunities Fund and Blackrock European Hedge Fund caught a significant amount of the equity upside in their respective markets through the period, contributing 0.1% and 0.3% respectively. We made the decision to sell our Schroder Gaia Indus Pacifichoice hedge fund after a period of poor performance. On the back of this we kept our emerging market equity exposure at similar level by increasing our holding in the KLS Sloane Robinson Emerging Markets Fund.
Property had a good month and recouped some of the losses from the prior month. The sector contributed 0.4% to return. Summit Properties Ltd recovered 12% from its fall in the prior month which provided the majority of the contribution. As this position rerated we lightened our exposure given recent news flow.
The only sectors which posted negative returns were credit and public equity which detracted 0.1% and 0.04% respectively. Within credit our holding in Axiom European Financial Debt Fund Ltd fell 3.7% due to its discount widening out. This detracted 0.1% from performance. Our public equity exposure was hurt primarily by our holdings in Sigma Capital Group PLC (‘Sigma’) and Burford Capital Ltd. We have strong conviction in both names and believe the recent sell off was mostly driven by profit-taking. Burford Capital Ltd recently reported strong results with impressive growth rates and we expect similarly strong results from Sigma when they report in April. We opportunistically added to Sigma on weakness throughout the period.
More dovish central banks have boosted all financial assets and we now await signs of a turn in global growth momentum to drive the next phase of the ongoing rally, with Chinese stimulus measures currently the main support for global growth. The US yield curve inversion is a worrying sign but we have yet to see other indicators follow its lead. The compression in risk premia since December 2018 has been marked and, with a number of significant macro risks awaiting resolution, it is important to remain alert to opportunities to rotate between asset classes to reduce risk and capture opportunities.