Sandaire’s Investment Committee met on November 5th to consider the market environment and whether any changes were required to portfolio allocations. It was agreed that there were no major shifts required in asset class weightings but that downside risks were more apparent in equity markets, particularly in Europe. The committee felt further evidence was required to warrant a change in regional weights ahead of the formal asset allocation meeting in December and a summary of their views shown in their recent committee meeting are outlined below.
It was suggested that a modest softening is being shown in both growth and credit conditions in the US, which appears consistent with softer earnings revisions and weaker capex investment. On the other hand, the consumer is buoyant helped by firmer wage growth.
The economy continues to expand, proving positive for risk assets, although earnings growth may be peaking so extra attention will need to be given to watch for higher input costs and pass through effects. Given the extended period of growth to date, and the likely wider set outcomes ahead of us, a higher risk premia in equity markets appears justified in the view of our Investment Team.
Valuations were reviewed in light of recent market declines. As stated in the recent Investment Team podcast, it is believed that this is a corrective phase for the market and not a ‘bear market’. Forward Price / Earnings have declined, particularly in the US, and are now back to more historic norms (see chart). It was discussed that the current sell-off is not outsized by historic measures and if recessionary risks were appearing then the Investment Team would expect bigger declines. This reaffirmed the team’s neutral weight to equites.
European data appears uniformly weak, with survey data suggesting slowing activity and the team knows that net exports have shrunk without an offsetting pick up in consumption. With the central bank withdrawing stimulus and the spectre of a prolonged battle between the Italian government and the EU, risk premia in Euro assets should continue to rise.
The team also reviewed Emerging Markets and particularly China as indicators have weakened but so has the Yuan and the required rate of return. Export growth has been hit by trade tariffs and there is a further risk to the Yuan if there is another increase in tariffs in January. Elsewhere in Emerging Markets, it was noted that sentiment within the manufacturing sector may have bottomed, however the positive reaction to elections in Brazil and trade agreements in Mexico were also noted. Given the sharp declines this year there was no consensus that Sandaire should move to neutral in Emerging Markets but the committee agreed to review Sandaire’s country specific exposure to ensure optimum exposure to the region.
The team discussed Sandaire’s exposure to UK assets and saw no reason to remove the negative view on UK equites and fixed income, given significant uncertainties in Brexit negotiations and likely outcomes. The team are aware of the risks to client portfolios of a positive outcome, and therefore a positive move in Sterling, impinging upon overseas market returns.
For more insights from our Investment Team on the current market, take a look at their recent podcast here and keep an eye out for further market updates. If you are a client of Sandaire and have any questions then please do not hesitate to contact your relationship manager.