It has become apparent that global monetary policy stimulus is beginning to kick in, with signs emerging that the growth slowdown is beginning to moderate. Expectations around GDP growth have been lowered but forward expectations have now levelled off and certainly this provided a boost to equity markets. With that backdrop, equities delivered another positive month of more than 2%, and in the US, the S&P 500 hit record highs again in late November.
The shift in expectations and positive market moves appear correlated with the easier monetary policy outlook, with the US Federal Reserve expected to stay on hold throughout 2020, and with signs of a de-escalation of trade frictions. Recent indications emerged that talks around the US-China trade war are beginning to bear some fruit, with early signs of some sort of agreement on the table. It is expected however, that it is unlikely that a formal agreement will be announced before end 2019. Nonetheless, for the market, mere signs of agreement are sufficient for now.
On the currency side, it has been a risk-on month with the UK Pound Sterling, which continues on a stronger path based mostly on optimism around the expected election results in December. Current expectations have the Conservative Party with a clear lead, which would imply a much easier political trajectory for a Brexit deal.
Interestingly, despite the positive equity risk sentiment, bond yields did not sell-off as much as may have ordinarily been expected, and US 10-year bond yields continue to hold at around 1.80%. Emerging market bond spreads fell again with the EMBI spread falling to around 310 by month-end.
Our previous move to increase equity weighting has paid off given the positive month, but we are also wary of markets beginning to price in a too positive outlook – in particular at a time when political uncertainty is increasing, and by implication, policy uncertainty.
A shift in focus is also emerging, in that the effectiveness of monetary policy – in an era of ultra-low interest rates – is being questioned. This implies that in order to lift the global economy into a higher growth scenario will most likely require fiscal stimulus of some sort. Certainly, in Europe, this seems to be the case, and Germany in particular is seen as the most likely candidate. We do however, question whether the political will is there to move away from the ingrained austerity mindset, and hence Eurozone growth is destined to muddle along and play second fiddle to the US in particular.
Accordingly, we retain our underweight Euro area position. Instead, we continue to favour risk positions in Emerging Market exposure on an incremental basis. From a regional perspective though, our expectation is that certain Emerging Markets will continue to perform well, whilst others may lag somewhat. Certainly, our preferred exposure is to add to EM Asia positions. One laggard is likely to be India, where more recently, their economic slowdown has been more severe than previously expected. In the medium term though, we do believe the RBI has acted and will continue to act to support the economy.
Within the funds we have also reduced our overall US exposure in favour of EM Asia, as a result of relative valuation perspectives. We also slightly reduced our India equity exposure, exchanging that for broad EM global equity. No changes were made to our overall Fixed Income positioning.
With global equity markets rising, the Global Growth Fund, denominated in US dollars, showed a pleasing 1.4% return for the month and the Sterling Asset Management denominated in UK Pounds, also delivering a positive gain of 1%.