Back in the 1800s, Charles Dickens gave us Ebenezer Scrooge, the cold-hearted protagonist of his novella, ‘A Christmas Carol’, who despised Christmas. The idea of something, or someone destroying Christmas is so captivating and horrifying to us that 2018 saw the release of the movie, ‘The Grinch’, which was based on Dr Seuss’ 1957 children’s book ‘How the Grinch Stole Christmas!’. It starred none other than The Grinch himself, whose mean temper and dislike of Christmas are some of his most well-known characteristics. What a treat would be to have them both over for a drink!
From fiction to the reality of year-end fast approaching. Given the positive performance of most markets in 2019 so far, it is no wonder that some of us are already feeling decidedly festive. As Geneva’s shops and streets have become decorated in lights and adorned with all things red and green, and my son impatiently opens ‘just one’ door of his advent calendar each day, I still find myself asking whether the Grinch (or Mr Scrooge) will make an appearance in the markets, just as he did last year, when they were roiled by record falls before the start of the Christmas holiday.
Investors who expected something to steal their joy already in November were proven wrong. Most risky assets had a pretty strong month and US equity indexes reached repeated record highs, in a late show of force by equity markets. While the volatile trade talks between the US and China hang over the markets, concerns were muted by a series of marginal agreements and de-escalation measures taken by both sides during the month.
- Developed market equities had yet another strong month on the back of receding recession fears and signs of progress in US-China talks. The S&P500 gained 3.40% in the United States, the STOXX Europe 600 gained 2.69% and in Japan, the Nikkei 225 gained 1.60%.
- Fixed income markets had another mixed month, as the Fed signalled it was going to hit pause in the interest rate cut cycle in the US. Elsewhere, lower risk aversion meant that sovereign and high grade bonds underperformed investment grade and high yield bonds. US Treasuries lost 0.29%, US investment grade bonds gained 0.25% and US high yield bonds ended the month up 0.33%. In Europe, sovereign bonds lost 0.90% and investment grade bonds lost 0.25%, while European high yield bonds gained 0.85%.
- Emerging markets had a mostly negative month, despite better news coming from the US and China regarding their trade negotiations. Negative news from India with a lower-than-expected GDP growth and the political chaos in Latin America helped to keep prices under pressure. EM equities lost 0.19%, while EM bonds gained a meagre 0.03%.
- Oil prices had a positive month, gaining 1.83% as the lower risk of a global economic recession helped the commodity to grind higher.
- Gold lost 3.24%, thanks to the stronger US Dollar and increased risk appetite of investors, lowering the appeal of the yellow metal.
Global markets in numbers
Market Outlook and V3´s position
While markets have been looking healthy of late, with records being broken and year-to-date performances showing great promise, it is no secret that there are many uncertainties casting clouds. The real state of the global economy, with emphasis on the magnitude of the deceleration of both US and Chinese economies, is a huge question mark. What we do know is that nothing has the power to move markets (and potentially steal Christmas) as the trade talks between the US and China.
The Chinese have been playing a long-term strategic game, trying to show the world that the country is willing to compromise by opening up its economy, enforcing intellectual property rights and curbing cyber-crime. Meanwhile the picture in the US is not as clear. There are lots of reasons for that, some of the main ones include the fact that the US is losing its global influence and that, even inside the Trump administration, there are conflicting agendas fighting to prevail - quite apart from the fact that the President himself is a major source of instability.
As the US readies to start another election cycle in 2020, it is unclear which strategy Trump will use. If he believes that delaying an agreement with the Chinese will give him a better chance of winning next year’s election, you can be sure that there will be no agreement to be signed in the foreseeable future. Worse than that, if Trump believes that the best electoral strategy is to confront the Chinese (and perhaps a handful of the US’s allies too, just to spice things up), it is likely that the situation will get worse before it will get any better, with markets reacting accordingly.
In this situation, we believe that the best approach is to keep the portfolios protected against the tail risk of major selloffs (prompted by negative headlines on the trade front), while not giving up core allocations that can boost performance in the case of a positive outcome. While the perfect hedge does not exist, we believe that buying put options (whether using listed options or using alternative warrants with an optimised strike) is a prudent step that investors could take to find the right balance between taking advantage of any further upside, while not losing sleep over being exposed to too much risk in case of a correction. We still like emerging market bonds and selected high yield and investment grade bonds for their credit spread and although we do see space for a duration rally, with longer bonds outperforming shorter ones, we prefer to remain underweight duration for the time being.
We are ready for the festivities, Grinch or not! Wishing you all a great end to the year!
For more information, please contact our Chief Investment Officer, Cássio H. Valdujo, on:
+41 22 715 0910