Monthly Market Outlook

Risks are inevitable and not to be feared

September 2019 (click to download)

Towards the end of last month, we took another step closer to a ‘no deal’ Brexit with the approval of a suspended parliament in September. While critics declared it a ‘constitutional outrage’, it was the latest twist in what has been an extraordinary political saga. As several risk factors converge (Brexit, US-China trade war, the threat of recession and inflation concerns), the outlook for the remainder of 2019 is unquestionably opaque. But to what extent should investors worry? Here, the Manager discusses the risks at large and why they are not necessarily to be feared.

Brexit: why deal/no deal is not really the question

Even if we were to experience the hardest of Brexits, the Manager is confident portfolios would feel little impact. The Funds’ exposure to UK stocks is limited, and where they do have exposure, those companies tend to earn revenues globally. Given that a hard Brexit is likely to be accompanied by a falling Pound, such UK-based companies will get a boost in value in Sterling terms. Ironically, the biggest risk to investors is if the Pound rallies in the wake of a deal and gilts are sold off. But there will also be positives associated with that outcome – not least the fact that we will have some certainty at long last. In the main, the Manager is comfortable that clients are not over-exposed to the Brexit risk – whatever the outcome.

“The risks facing economies and markets are rarely so well flagged. Despite the

obvious macro concerns, conditions remain supportive for business with borrowing

costs remaining low. The macro backdrop suggests these low rates will be in place for

longer than expected and are starting to look like a permanent feature of capital markets.”

Philip Smeaton, Chief Investment Officer

Sanlam Private Wealth

A trade war at large

The trade war between the US and China means that businesses around the world must deal with ongoing cost and supply chain uncertainty. While this sounds worrying, we must put this into perspective. When Japan was devastated by the tsunami in 2011, businesses around the world had their supply chain cut off overnight. Indeed, some companies were 100% reliant on Japan for critical component parts. While lessons were learnt in terms of over-dependence and diversifying geographically, the reality was that supply chains took just one month to adjust to the crisis. In other words, businesses can adapt quickly if they must. And they will.

The threat of recession

During August, the yield curve inverted in the US and UK, meaning short-term interest rates became higher than longer-term rates. History suggests this is the pre-cursor to recession, and it quickly had the effect of a sell-off in equities as investors grew nervous and looked to bank some of the strong gains enjoyed so far this year. While this nervousness is understandable, it should also be noted that an inverted yield curve increases the risk of a recession but does not guarantee one. If a recession were to follow, this could take anywhere from six to 24 months to manifest. And as discussed on page two, it’s not necessarily to be feared in any case.

Investment view: Don’t let fear underpin investment decisions

Investors who sell frantically as a reaction to negative headlines and perceived risks run the risk of locking in losses, which may take a long time to recover. Indeed, the market falls we saw at the end of last year were closely followed by a market recovery, which many worried investors missed out on.

Short-term fear versus trusting in the longer-term outlook

While fears are justified, we must also ask ourselves: what if Trump capitulates on his trade war, Brexit is resolved positively, and the economic data improves as the recent rate cuts and a return to quantitative easing drive the markets to new highs? As the graph below shows, the expected earnings per share has remained relatively stable over recent years, while share prices have oscillated. This illustrates the difference between a measured outlook versus an emotional reaction to a piece of news.

Expected earnings per share versus actual share prices

Source: MSCI, Bloomberg

Managing the risk and reality of a downturn

Unlike the previous two recessions, we’re not in the middle of a banking crisis or a valuation bubble, which means there are lower associated equity losses. In the event of a recession, the Manager would expect to increase its equity exposure and take advantage of pull-backs in markets to cherry pick the most attractive assets and further improve the potential for long-term returns.


In the meantime, the Manager has lowered its exposure to equities, while ensuring it is ready to quickly take advantage of any opportunities that arise. Additionally, the Manager has focused its equity investments on companies with lower sensitivity to stock market moves where the profit outlook is less dependent on the economic cycle. The Manager’s investments in Real Estate Investment Trusts (REITs) and infrastructure, for example, are less sensitive to economic growth, and the companies in which it invests are generally more defensive than the market. At the same time, while fixed income may not have the return potential of equities, these assets can appreciate even in times of market stress and counteract some of the volatility in equity markets.


So, while the prospect of a recession can be scary, mitigating action can be taken. Investors should be careful not to act based on fear. A great deal of harm can be done to long-term returns by selling at the wrong time.

Source: Sanlam Private Wealth

Sanlam Private Wealth is a trading name of Sanlam Private Investments (UK) Ltd.


To learn more about VAM Funds, please contact us at or on +230 465 6860.


This document is intended for use by professional financial advisers only. The distribution of VAM Funds and the offering of the shares may be restricted in certain jurisdictions. Private investors should contact their financial adviser for more details on any of the products featured. It is the responsibility of any person in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdictions. Prospective applicants for shares should inform themselves as to the legal requirements and consequences of applying for, holding and disposing of shares and any applicable exchange control regulations and taxes in the countries of their respective citizenship, residence or domicile. Click for Important Information