Tiller investor update: May 2019

After four months of rising stock markets, May bucked the trend. Any hopes of a trade deal between the US and China were dashed when President Trump took to Twitter to threaten a further increase in tariffs from 10% to 25% on over $200bn of Chinese imports. A few days later, this threat was followed through.

This put all stock markets under pressure with Chinese stocks being some of the worst hit, but all major geographical regions falling.

The only hiding place in equities came from some of the active funds. Notable mentions go to Polar Capital Insurance (up 3.3%) and Jupiter Absolute Return (up 2.1%).

Lower expectations for economic growth tend to push bond prices up and they have been a reliable counterweight to equities in May. Government bonds yields globally fell over the month and moved prices up. This continues the trend we highlighted in the recent newsletter to clients.

This is responsible for our lowest risk portfolios being up over 3% from the start of the year to the end of May.

Domestically the impact of UK politics was felt again in May, as any potential knock-on effects for Brexit were reflected in market dynamics.

For example, UK mid-caps and commercial property stocks underperformed the more international large caps (as proxied by the FTSE 100).

Sterling weakened against all major currencies. Against the euro and the dollar, it fell by around 3%.

All of which was reminiscent of last November, just less extreme. On that occasion, we found our performance relative to the average UK wealth manager lagged and we expect May to be similar. It still leaves most of our portfolios ahead of industry benchmarks year to date.

It also suggests that the average UK wealth manager is running portfolios that are set up to mainly benefit from a no-deal Brexit and therefore remain exposed to any form of a deal.

As mentioned in the quarterly newsletter we send to clients – an increasing number of warning signs are flashing amber.

Maintaining a degree of caution in our portfolio positioning has proved prudent, and we see little reason to deviate significantly from this at present.

For example, the spread between 3 month and 10-year bond yields has inverted – meaning you get a lower yield on 10-year bonds in the US than 3-month bonds. This historically has warned of a future recession – typically 18 months ahead of time.

Furthermore, the performance of GDP sensitive sectors, such as those linked to the consumer, have been underperforming more defensive sectors recently. This again suggests the market is looking ahead to slower GDP growth.

We would argue the government bonds market are now pricing in a more negative view of the world than equities and we would rather wait for a better buying opportunity before adding more to equities.

As the UK ten-year government bond yield has fallen below 1% we are reviewing our government bonds holdings.

Choosing the right index: FTSE Developed Asia Pacific ex-Japan ETF v MSCI AC Far East ex-Japan

On the face of it, the above indices look very similar. However, months like May prove this is not always the case. The first is down 5.6% in local currency terms (i.e. with the effects of sterling stripped out) while the second is down 10%. The difference comes from the regional allocations within the two. Whilst the first is concentrated on developed Asia and holds a lot in Australia and South Korea – the second has a lot of China exposure.

It’s not often the performance of two ETF’s tracking these indices diverge so much and really highlights the importance of understanding geographical exposure.

The views contained herein are not to be taken as a recommendation or advice. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. A mandatory sell of a theme may result in a taxable capital gain or loss. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on Tiller’s website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. It should be noted that investment involves risks, the value of investments may fluctuate in accordance with market conditions and investors may not get back the full amount invested.

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