January’s equity market recovery continued into February, albeit at a slower pace, as markets focused on a receding probability of US recession and a significantly more dovish Federal Reserve.Summary

• January’s equity market recovery continued into February, albeit at a slower pace, as markets focused on a receding probability of US recession and a significantly more dovish Federal Reserve (Fed). The MSCI All Countries Index was up 2.5% in the month.
• Progress being made in US-China trade talks, although no end in sight yet. Key to talks will be currency issues, with much talking the US dollar down by President Trump.
• Despite lurching from one Brexit scenario to the next, the UK appears to be coalescing around less risk of a no-deal, which markets interpret as positive and so Sterling continues to be stronger against US dollar.
• Emerging markets continue to be in favour, with Emerging Market Bond Index spreads continuing to narrow back to levels last seen in mid-2018, whilst US Treasury yields were relatively stable in the month.

Market update

Markets continued to walk back their doomsday predictions following December’s equity crash as optimism eventually prevailed. Now however, signs are there that the Fed is moderating its tone, and the economic data, although mixed, does not at this stage point to a cataclysmic fall-off of economic growth. US labour markets continue to be healthy, signifying a moderation rather than collapse.

In China, concerns had been increasing about the growth slowdown, evident when manufacturing indices fell below critical level for the first time since mid-2016. However, the slowdown does not seem to be accelerating and there has been a growing pragmatism from Chinese authorities in managing the dynamic.

Clouding the issue though is the US-China trade talks which are dragging on, leaving a heightened sense of uncertainty hanging over the market. We do however feel that much of the delay is also politically driven, and certainly, a deal of some sorts will be welcome news to the Trump Administration who are a little low on victories at the moment. Expectations are that ultimately pragmatism will win the day and hence markets are edging towards reading an eventual positive outcome.

With the receding into the background of the extremely negative scenarios, including in the UK, where a no-deal Brexit possibility is now less likely, and markets’ risk appetite has increased and this has favoured exposure to emerging markets, with EMBI spreads continuing to decline.

Our overall macro view is that support for the US dollar is unlikely to remain at the same levels as before, especially now that the Fed has come round to a more dovish stance.  On sterling our view has remained that much of the possible bad Brexit news has already been discounted and accordingly we stick with our more neutral, rather than short FX position.

 

Portfolio strategy

Our overall neutral equity stance remains, but we have increased exposure to the US whilst decreasing exposure to Europe where we have shifted to underweight, and Japan where we still remain overweight. Our overall weight to emerging markets remain, but, given most recent moves are on heightened alert to lock in that profit.

In fixed income, whilst a slowing global economy generally means inflationary pressures reduce, we are cognisant of the fact that, in particular for the US, labour markets remain tight, and hence upside risks to inflation could also be present. Given the level of nominal yields, we have accordingly shifted some bond exposure to inflation linkers as a hedge.

On the back of the positive sentiment, the Ashburton Global Growth Fund (USD) rose by 1.3% in the month. The Asset Management Funds all ended the month on a positive note - the Sterling Asset Management Fund up 0.8%, and both the Dollar and Euro Asset Management Funds up 1.0%.