Market commentary – July 2019
Unless otherwise stated, returns are MSCI price indices expressed in local currency terms. UK equity market performance is represented by the FTSE All-Share Index in GBP.
Performance across global assets in July was more muted compared to a very strong June. Global stock markets finished the month almost flat, driven by the UK market (+1.0%) as a weaker sterling propelled export-focused multinational equities in the FTSE All-Share. In the US, the S&P 500 (+0.7%) reached all-time highs. Global government bonds posted modest gains, with strength in European bonds and UK Gilts offsetting mild weakness in US Treasuries. July was a good month for precious metals, however, other commodities were down including oil, hit by softer demand and growing tensions in the Persian Gulf.
In the UK, Boris Johnson won the leadership of the Conservative Party, propelling him to the post of Prime Minister. In reaction to this, sterling was the worst-performing currency of the month, with a potential “no-deal” outcome being increasingly reflected in the currency. However, the current configuration of parliament has demonstrated that it is not willing to allow the UK to leave the EU without a deal and to do so would thus likely require either a general election or a fresh referendum.
On the last day of July, the US Federal Reserve (Fed) cut rates by 0.25% for the first time since 2008. The move had widely been priced in by the markets, but those participants pricing in a much larger cut of 0.50% were disappointed. The Fed also opted to end its balance sheet runoff effective of the date of the meeting rather than at the end of September. Overall, the US economy is stable and remains one of the stronger economies globally. Over the month, the US jobs market bounced back from weak data in June and the second-quarter GDP numbers beat analyst expectations.
Christine Lagarde was nominated to take over from Mario Draghi as the leader of the ECB this November. For many investors, the appointment signals a continuation of accommodative policy, further reiterated during the ECB governing council meeting as members strongly hinted at another easing package by the end of the year. Additional rate cuts, as well as a revival of the asset purchasing scheme (quantitative easing), could still happen. High grade corporate debt would likely be targeted as part of further asset purchases, which prompted European credit to rally strongly.
Performance and activity
Over June the fund’s Net Asset Value (NAV) gained 1.6%, the share price fell 2.5%, and the Company’s Association of Investment Companies (AIC) Flexible Investment peer group returned 2.3% in share price terms (source: Morningstar). The FTSE World Total Return Index, which the Company aims to outperform over the long-term, returned 4.4%. The Company’s NAV is up 6.6% for the year at end July 2019.
During the period the Company benefitted from its overseas currency exposure as sterling depreciated due to the chance of a hard-Brexit increasing. The Company’s benchmark was up 4.4% in sterling and 1.1% in local currency terms. The Company’s positions reflected this, generating significant gains from overseas currency exposure.
All asset classes generated positive performance. Private equity was again the highest contributing sector with HarbourVest Global Private Equity Ltd rising 6.6% and contributing 0.2% to performance. The asset class contributed 0.6% in total.
Public equity that was flat on the month. Positions in Burford Capital Ltd and Euro Stoxx dividend futures offset positive contributions, mainly from healthcare positions.
At the start of July a 1% position in Augmentum Fintech PLC was added. Augmentum focuses on early-stage investing in fintech companies within Europe. Augmentum has a number of fundamentally attractive holdings including Interactive Investor and Zopa. We see a potential positive valuation catalyst for Interactive Investor due to the acquisition of Alliance Trust Savings. We are also positive on Zopa with its main business in peer-to-peer lending, an area attractive to many lenders in the current interest rate environment. Zopa also acquired a banking license in 2018 which facilitates growth into related markets and greatly increases its addressable market.
During the month we increased our position in the CIFC Global Floating Rate Credit Fund. We have historically invested in listed collateralized loan obligation (“CLO”) funds that invest in the equity tranches of CLOs. We have reduced our exposure over recent years but have added CIFC due to its more conservative nature. CIFC invests in the debt tranches of CLOs rather than the equity and is currently positioned towards higher credit qualities. The fund aims to pay a dividend yield between 6 and 7% and generate a total return of 8%. We have noted historically that the listed funds can become illiquid when liquidity is most needed and CIFC provides us the benefit of having weekly liquidity.
We have minimised selling activity within the fund, most purchases having been made from cash. We have however taken the decision to trim our position in Axiom European Financial Debt.
Since falling sharply in May, world equity markets have recovered strongly. Two key reasons are apparent. First, central banks have become more dovish, suggesting that financial conditions will remain favourable. This has driven a sharp re-pricing of interest rates and increased the attractiveness of equities. Second, recent comments from Trump and Xi suggest that they will meet at the G-20 Summit at the end of June which has spurred hopes for a trade war truce.
We believe that after the sharp rally in the first half of 2019 that returns will be muted in the second half. The markets are pricing in significant action by world central banks leaving little room for markets to be surprised on the upside. Whilst it is positive that Xi and Trump are meeting in person we are not convinced that we are past trade war volatility in the markets. Last of all we also note that world economies have weakened in 2019 and this has been reflected in earnings estimates.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down.
Liquidity: The ability to buy or sell a particular security or asset in the market. Assets that can be easily traded in the market (without causing a major price move) are referred to as ‘liquid’.
Quantitative Easing: An unconventional monetary policy used by central banks to stimulate the economy by boosting the amount of overall money in the banking system.