The global economy slowed further in September, particularly in the manufacturing sector which is the most directly exposed to weakening trade. The Eurozone saw its largest contraction in manufacturing activity in 7 years, but the UK and Japan are experiencing a similar slowdown. Even more worryingly, the US joined the ranks of nations with a contracting manufacturing sector for September (number published after the end of the month). This shows how trade tensions are affecting the global economy. It is worth pointing out though that the services sector is still holding up. In the US as an example, it represents 70% of GDP so this is the key area to watch.
The economic slowdown, without much surprise, triggered global central banks into action. There were cuts and easing policies in the US and the Eurozone, while central bankers in the UK and Japan were at pains to indicate that they remain ready to act if necessary. What is obvious, however, is that monetary policies are reaching their limit and have less and less potency. After more than a decade being in place, extraordinary measures have now become ordinary, and new tools are required to give the economy the jolt it requires. Fiscal stimulus would be an obvious such tool at a time when interest rates allow governments to borrow for nothing and when infrastructure improvements are necessary in all major developed countries. Unfortunately, the political environment is as fractured as ever, making it difficult to gather enough support for such measures.
Talking of the political environment, remarkable events took place on both sides of the Atlantic. Firstly, the UK is getting close to a constitutional crisis after the Supreme Court ruled Mr Johnson’s decision to prorogue Parliament illegal. This judgment appears to lead both sides of the Brexit debate to be even more firmly entrenched in their views and makes a deal with the EU by the end of October less likely as each party is fighting for the upcoming elections. Then, in the US, impeachment proceedings started against President Trump, polarising opinions even further and creating yet another distraction for the political leadership.

Despite the messy picture painted above, markets recovered in September from the turbulent summer and developed equity markets were able to end the third quarter with positive returns. The picture was more mixed in emerging markets as China continued to be hindered by trade tensions with the US and political tensions with Hong Kong. Bond markets gave back some of their recent gains, unsurprisingly given how quickly bond yields had moved.
Under the surface, however, there was a striking shift in market leadership. Value equities (i.e. equities that are cheap now relative to their intrinsic worth) staged a formidable comeback relative to growth (i.e. equities cheap relative to their future worth based on their expected growth) or momentum equities (i.e. equities performing well because they performed well in the past). This is of great importance because the value style has been a laggard since the Great Financial Crisis and it is a style that we are biased towards. One month of performance doesn’t make a trend but, historically, when Value starts to perform, it happens in an explosive and sustained fashion, so we are monitoring this development closely.

The TB Wise Multi-Asset Growth fund was up 0.8% in September, behind the CBOE UK All Companies index, up 3.5% and broadly in line with its peer group at 0.8%. The UK equity market, despite a headwind from a stronger pound, was pulled higher by strong performance in the financials and oil sectors. In terms of our fund, our gold positions detracted from performance, giving back some of their strong gains from the summer. We mitigated that impact by taking profits in our position in the Blackrock Gold & General fund though. On the positive side, the top contributors were the Woodford Patient Capital trust which appears to have found a lower level in price, HG Capital trust which released strong results and the JO Hambro UK Income fund which benefitted from the rebound in the value style.

Regarding portfolio changes, other than the trimming of our gold positions, we took some profits in the HG Capital trust and the Miton Global Infrastructure Income fund, recycling this cash into cheap value-biased equity funds and emerging markets.

Vincent Ropers 30 Sep 2019
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