Quarterly Market Overview - Q2 2019

Risk assets performed very well in June, as the world’s major banks shifted to more supportive rhetoric about the path of interest rates and the potential use of non-standard monetary policies, such as quantitative easing.

The Federal Reserve (Fed) moved towards a more supportive monetary policy stance, as inflation slowed more than expected. Meanwhile President Trump rescinded his threat to implement tariffs on Mexico and offered hope that a deal would be reached with China. These developments helped ensure that US equities led the market higher.

Trade developments were also advantageous for Chinese equities and broader emerging markets, which reversed their trade-related losses from May. European equities also made strong gains after the European Central Bank’s (ECB) annual forum.

Sterling’s weakness has been the key support for UK equities, which made solid gains in local currency terms. Japanese equities were the laggards as the Bank of Japan failed to match the actions of the Fed and ECB, even if it continues to assert that it has options to stimulate its struggling economy.

The shift towards more supportive developed world monetary policy was advantageous for fixed income markets, which generally made strong gains. Corporate bonds generally outperformed sovereigns, as the threat of protectionism declined and investors began to anticipate that monetary stimulus would boost growth.

Levitas A

It was a good quarter for the portfolio in both absolute and relative terms with the fund outperforming the IA Flexible sector. This is in contrast to the more difficult end to 2018.

It was a bit of a rollercoaster ride for risk assets in the portfolio such as equities. April was a good month although markets pulled back in May following the breakdown of the trade discussions between the US and China. However, investor sentiment then improved again in June as the Federal Reserve became increasingly supportive.

International equities were once again the main driver of returns and again were assisted by a weakening of sterling. European mid and small cap position performed exceptionally well as did global smaller companies, technology and the US. Despite a difficult May, Asia and Emerging Markets recovered towards the end of the quarter to deliver some decent positive returns.  

Domestic equities continued to lag although returns were generally still positive. Investors are increasingly concerned regarding the political risk within the UK with heightened fears of a no-deal Brexit scenario being played out. In terms of attribution the portfolios overweight to global and thematic positions as well as the US was positive whilst our overweight to UK smaller companies and underweight to US smaller companies was a slight drag. The largest positive impact on the portfolio was our manager selection with our European, US, Asian, Emerging markets funds outperforming their respective benchmarks.

We made limited changes to the portfolio over the quarter aside from a few minor tweaks to bring the portfolio OCF down towards its 0.8% target. Towards the start of the quarter we did sell the City Financial Absolute Equity hedge fund which has had a run of very poor performance. This decision has proved beneficial as the fund has declined further following the sale. At the end of the quarter we also opted to reduce our exposure to UK smaller companies – we feel this part of the portfolio is exposed to Brexit risk, a snap general election risk as well as liquidity risk. We have moved the proceeds to larger cap positions.
In terms of outlook whilst we are conscious that earnings growth has slowed and expectations for future GDP growth have moderated, both because of the impact of trade and the position we are in the cycle, central banks remain supportive which allows equity gains. Having said that we do think that the risk of market shocks is more pronounced so we are happy to reduce some risk within the portfolio following several months of decent returns

Levitas B

It was a good quarter for the portfolio in both absolute and relative terms with the fund outperforming the IA 0-35% Sector. This is in contrast to the more difficult end to 2018.

It was a bit of a rollercoaster ride for risk assets in the portfolio such as equities. April was a good month although markets pulled back in May following the breakdown of the trade discussions between the US and China. However, investor sentiment then improved again in June as the Federal Reserve became increasingly supportive. This has also been positive for fixed interest markets leading to a rare extended period where both bonds and equities have moved positively in a correlated fashion.

International equities were once again the main driver of returns and again were assisted by a weakening of sterling. Domestic equities continued to lag although returns were generally still positive. Investors are increasingly concerned regarding the political risk within the UK with heightened fears of a no-deal Brexit scenario being played out. Unhedged global fixed interest positions performed well as they received a boost from sterling weakness although UK corporate bonds also performed well.

In terms of attribution asset allocation was positive for the fund as our overweight to international equities was a strong driver of outperformance. Our underweight to gilts was also positive although the fact that a number of our global fixed income funds are hedged meant that our manager selection for this sector was a slight drag. Alternatives also continued to struggle with most funds failing to keep pace with their benchmarks.

We made some changes to the portfolio mainly towards the end of the quarter. We opted to sell the Neuberger Berman Uncorrelated Strategies fund which did not provide the positive returns in Q4 2018 that we would have expected. Its performance has improved slightly recently and this provided us with an opportunity to exit the position and add two convertibles funds, one that concentrates on Asia and the other on Global positions. These funds should provide the opportunity to participate in positive equity markets whilst also offering some protection investors find in the fixed income space.

In terms of outlook whilst we are conscious that earnings growth has slowed and expectations for future GDP growth have moderated, both because of the impact of trade and the position we are in the cycle, central banks remain supportive which allows equity gains. Having said that we do think that the risk of market shocks is more pronounced so we are happy to maintain our positions in fixed income and low correlation assets.

Key Information

The performance indicated for each sector should not be taken as an expectation of the future performance. Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator of future results. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with funds investing in emerging or developing markets.

The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others.

Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Brooks Macdonald Asset Management Limited is authorised and regulated by the Financial Conduct Authority, Registered in England No 3417519

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