When I was growing up, my parents always told me that it is important to have goals in life. That I should look beyond the here and now and never lose sight of my long-term objectives. This advice served me well in all areas of my life, including when dealing with investments and markets and is the foundation of most of my conversations with our clients. This is especially so in times like now, with the post 2018 Christmas market rally encouraging investors to take unnecessary risks, unbalancing their portfolios.
We can all agree that long-term goals are a necessity to achieving almost anything in life, however, there are times when they are counterproductive. There are plenty of examples of people blindly following their objectives, even when they are doing more harm than good. Recent market movers in this bracket include US President Trump and UK Prime Minister May.
In the US, President Trump is using his rhetoric to reinforce the idea of him being a tough negotiator and a fighter for the American dream. It is becoming clearer by the day that his objective is not to win a trade war, nor to curb China’s development and global influence, but rather to push equity markets higher and drive China into purchasing more soybeans before the 2020 elections. The long-term objective appears to be to increase his chances of re-election, while giving up on the massive leverage that his more-often-than-not reckless foreign policy gave him (such as the implementation of tariffs), whether you agree with them or not.
Across the Atlantic, Prime Minister May is doing all she can to get a Brexit deal through parliament. At times this has led her dangerously close to pushing the country towards crashing out of Europe without a deal - despite her recent concession of a "short, time-limited extension" in case the House of Commons rejects her deal by 12th March. Will her ultimate objective – to have her agreement approved and achieve an orderly Brexit - be reached, or will she end up being infamously known as ‘the one who managed to make David Cameron look good’ in the eyes of history?
Meanwhile, investors inched closer to their objective of recovering last year’s losses, as global equities kept grinding upwards and bonds showed they still had some stamina left after January’s impressive performances:
- Developed market equities had another strong month, with gains across the board, albeit at a slower pace than the previous month. The expectation that the US and China were not far off an agreement to halt, if not end, the trade war, coupled with news that the US was close to averting another government shutdown (as president Trump seemed inclined to accept a border spending deal reached by Democrats and Republicans in congress) helped to keep the positive sentiment alive. The result was that equity markets were pushed up – that was despite renewed political noise coming out of Europe, related to Brexit and the snap Spanish elections called by its minority government. The S&P500 gained 2.97% in the United States, the MSCI Europe gained 3.91% and in Japan, the Nikkei 225 gained 2.94%.
- Fixed income markets had a month of mixed results, with US sovereign bond yields climbing in response to the lower risk of an overshoot of interest rates by the Federal Reserve, while credit markets kept at full throttle and recorded gains once again. US Treasuries lost 0.26%, while US investment grade bonds gained 0.22% and US high yield bonds ended the month up 1.66%. In Europe, sovereign bonds lost 0.37%, while investment grade bonds gained 0.69% and European high yield bonds gained 1.93%.
- Emerging markets had another positive month, helped by the persistent risk-on sentiment in the markets, but had to contend with the stronger US Dollar. EM equities gained 0.10%, and EM bonds gained 0.80%.
- Oil had another strong month, jumping by 6.38% on top of the extreme gains recorded in January. This price move was a direct result of the trade deal between the US and China, as well as output cuts by OPEC and Russia, which tightened global supplies and lead oil exports by OPEC countries to fall to their lowest levels since 2015.
- Gold had a negative month (its first monthly loss since September 2018), losing 0.60%, as a result of the strong US dollar and despite renewed interest from central banks, such as Russia and Kazakhstan, in their quest to diversify reserves.
Global markets in numbers
Market Outlook and V3´s position
Sometimes it is interesting, and even funny, to reflect on our own long-term objectives and those of others and see what the real outcomes were. Let’s take, for example, the US and its global war against what it calls ‘unfair trade practices’. Central to ‘making America great again’, the country began a tougher foreign policy. Not only were tariffs implemented, but trade agreements were re-discussed and some were outright cancelled. The result one might have projected was that the US’s trade balance would improve markedly. In 2017, the deficit reached roughly 500 billion dollars. In contradiction to what we might have expected, the following year, not only did the US end up buying more (on top of the economy growing, importers anticipated purchases to escape planned tariffs), it also sold less agricultural goods to China, as their retaliatory tariffs made other producers, such as Brazil, much more attractive to local buyers. The trade strategy increased the US trade deficit in 2018 to a 10-year high of 621 billion dollars (70 billion more than the previous year), contrary to Trump’s initial goal of closing the US trade gap.
Many analysts rightly say that the US’s trade balance often moves inversely to the health of the American economy. The more disposable income US consumers have, the more they consume and purchase imported goods - in other words, the greater America gets, the more it buys from its trade partners and therefore increases its trade deficit. What a great example of what we aim for and what we achieve sometimes being worlds apart, even when we take the most obvious path.
That is why we insist that it is in times of relative calm and tranquillity that one should have a hard look at whether a portfolio’s investment objectives are in line with those of the investor. More importantly, it is the chance to scrutinise the portfolio to make sure risks are being acceptably addressed. With markets around the globe showing increased complacency and with clear signs of economic deceleration coming from everywhere from Germany to China, there is too much hope that central banks will come to the rescue again (which is highly likely to happen). However, the result of another round of monetary stimulus might not be as rosy as what we experienced after the financial crisis of 2008/2009.
For now, we are keeping our neutral stance in equities and our positive view in select emerging markets. Nevertheless, we are keeping our finger on the trigger, ready to act in case of a change in scenario. That is why we continue to favour liquid investment strategies in all asset classes: as economic growth cools, the risk that investors will likely take profit on the riskier portion of markets cannot be neglected and even with liquidity on our side, the impact on prices may be severe.Our objective for 2019? Not to be caught in the middle of the hurricane. What about yours?
For more information, please contact our Chief Investment Officer, Cássio H. Valdujo, on:
+41 22 715 0910