Contrary to what was previously expected, the economic slowdown in the US continued in December, with the US ISM Manufacturing Index reaching 47.2, where anything less than 50 indicates a contraction. This level is the lowest level experienced since the Great Recession of 2008-2009 and is a clear sign that the US Federal reserve was correct in their pre-emptive approach to cutting the Fed Funds rate during the course of 2019.
Judging by market moves, with the S&P 500 continuing to hit new record highs, the consensus is that the synchronised monetary policy stimulus from global central banks will be sufficient to prevent a tipping over into a global recession. Indeed, the MSCI All Countries Index rose another 3.4% during December bringing the total return for the year to over 24% - a phenomenal performance given the worries that were driving the markets in December 2018. However, the continued weakness in US manufacturing is a source of concern, and will certainly have to be watched carefully.
One indicator that will have to be watched going into 2020 is the oil price, especially given the geopolitical issues that have emerged most recently in the Middle East. As it is, by end-December WTI Crude Spot Oil prices had risen to over US$61 per barrel, a rise of almost 16.5% since early October. As we have seen in the past, rapidly rising oil priced usually act as a brake on global growth, and hence, despite the monetary policy stimulus, caution will have to continue being the watchword.
On a broader note, the US dollar has continued to weaken, bringing total losses for Q4 2019 to over 3%. Given the backdrop of geopolitical tensions, safe haven assets such as the Japanese yen will be likely beneficiaries. Bond yields globally continue to drift somewhat in a range as sentiment tries to find a middle ground between risk and reward. Emerging market bond spreads fell again with the Emerging Markets Bond Index (EMBI) spread falling to the lowest levels in 5 years.
Our current positioning reflects an increase in our equity weighting to a slight overweight position which was triggered in particular by the UK election results, which handed Boris Johnson a clear majority making the path to Brexit that much easier. Accordingly we also shifted to an overweight UK equities position, given the relative valuation situation. This shift was funded from cash, which we had previously held precisely as a buffer for possible downside moves and for tactical shifts like the one we have now implemented.
Our overweight EM Asia counterbalances our underweight Eurozone position and beyond that we did not contemplate any substantial shift in our equity positioning for the time being.
On the fixed income side, we maintained positioning, although we do believe that substantial gains are unlikely to be made and hence our emphasis has been on EM exposure which has benefitted from the continued narrowing of EMBI spreads, to levels last seen over 5 years ago.
With global equity markets continuing the rising trend of 2019, the Global Growth Fund, denominated in US dollars, showed a pleasing 2.2% return for the month and the Sterling Asset Management denominated in UK Pounds, delivered a gain of 0.9%.