Monthly Investment Review and Outlook
February 2019 (click to download)
Risk assets continued to rally in February. This translated into mixed GBP performance, thanks to Sterling strength. The UK was the best performing equity region in GBP terms, delivering 2.3%, while the US and Europe rose 2.0%. Emerging market and Japanese equities were the laggards, declining -0.7% and -0.9% respectively, despite local currency gains.
Bonds declined in local terms, with the exception of UK corporate bonds (+0.1%). UK Gilts slid furthest (-1.0%), followed by European (-0.4%) and US government bonds (-0.3%).
GBP continued to rally, gaining 3.5% versus JPY, 1.8% versus EUR, and 1.2% versus USD.
In USD terms, oil continued to rally, gaining a further 6.4%, while gold weakened -0.3%.
The Manager anticipates that 2019 could be a better year for equity markets as many of the growth and liquidity challenges of last year have been discounted in share price valuations, after the significant declines in the fourth quarter of 2018. While economic growth will continue to be a concern, growth is more synchronised and greater central bank accommodation should temper the slowdown by providing liquidity.
The policy challenges of 2018 (such as US-Chinese trade disputes) are likely to find a resolution – many seem to be moving in the right direction already.
Given the decline in stock markets last year, valuations are supportive. The Manager expects modest assumptions around earnings growth and dividend yield to be enough to support share prices.
Finally, while risks remain in credit markets and in the durability of this economic cycle, the Manager thinks these risks are likely to remain contained in 2019 – inflation expectations and, therefore, interest rates are still low.
The Manager believes the recent slowdown will be seen as another mid-cycle pause, and not the beginnings of a more sustained downturn.
The Manager does not see the indicators typically associated with end-of-cycle conditions and, hence, thinks there is a low probability of a recession in 2019.
While the Manager expects the year to end on a positive note, economic and policy decisions, and thus markets, will not move in a straight line. 2019 will have its share of upward and downward moves and the Manager will continue to use its research to identify high quality, resilient investments which it feels will either add to return and/or reduce the experience of volatility in client portfolios. The Manager favours the concept of a barbell approach: exposure to investments that will drive capital growth and total return, balanced with assets that provide some ballast to portfolios against the turbulence in markets due to volatile news flow and financial data.
Source: Close Brothers Asset Management
Close Brothers Asset Management is a trading name of Close Asset Management Limited and Close Asset Management (UK) Limited. Both companies are part of Close Brothers Group plc, are registered in England and Wales, and are authorised by the Financial Conduct Authority. Registered office: 10 Crown Place, London EC2A 4FT. VAT registration number: 245 5013 86
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