April was another strong month for so-called “risk assets” (any asset class which presents some downside risk), prolonging the rebound observed since the end of last year. While the previous month was a period of consolidation amidst general concerns about the sustainability of the rally and slowing economic indicators, the most recent data provided a renewed impetus. Looking at the global growth’s two main engines, US and China, weakness earlier in the year would appear to have been a blip rather than the start of a sustained trend for now. Indeed, a slew of indicators from manufacturing to retail sales, to consumer confidence, to jobs data all pointed to a strengthening of the American and Chinese economies. Meanwhile, inflation remains under control and the US Central Banks reiterated its patient stance. Strong economies without the fear of central banks taking the punchbowl away: what’s not to like?

Added to this supportive macro picture, the earnings season in the US is also helping investors’ general sentiment. At the time of writing when about half of US companies have reported their first quarter numbers, 77% of them came out above analysts’ consensus, which is above its 5-year average. We noted in the past that expectations had been revised down at the end of last year, thus making them easier to be beaten. This is undeniably true but, in the short-run, the stock market is a voting machine, so sentiment and expectations are an important driver of price movements, which is what is currently at play.

In this context, markets and sectors the most geared to global growth were amongst the stronger performers. US equities and the technology sectors remained towards the top of the list but so did Japanese and European equities. We think the latter is presenting particular interest at present. While the domestic European economy still is one of the global laggards and political uncertainty remains a big risk, European companies are deriving about 60% of their revenues from outside of the Eurozone. Even more striking, close to a third of their revenues come from emerging markets. As a group, they are as exposed to China as they are to the UK so, while Brexit is another factor keeping a lid on valuations, it isn’t such a critical issue for European companies.

With all the above said, while the data we look at indicates that the environment should remain attractive for “risk assets” (i.e. late cycle as opposed to end of cycle), we still expect volatility to play an important part. It is a key characteristic of late cycles that one needs to be prepared to manage an increasing number of dangers lurking on the horizon. One area of concern to us this month, for example, is the record number of speculators betting that US volatility won’t rise from here: even with a supportive macro backdrop, complacency is a great danger and we continue to monitor it.

The TB Wise Multi-Asset Growth fund was up 2.5% in April, in line with the CBOE UK All Companies index, but behind its peer group, up 2.9%. Our strongest contributors were in the parts of the market we mentioned earlier, namely European equities (TR European Growth), Technology (Herald Investment Trust), and cyclically-biased parts of the market (Polar UK Value Opportunities). On the negative side, our two gold funds had a difficult month hurt by the dissipation of fear in the market and continued strength in the US Dollar.

In terms of changes in April, at the margin, we added risk to the portfolio on a regional level (Emerging Markets, China, Europe, UK smaller companies) as well as on the sectoral level (Technology). We also continued to look for idiosyncratic opportunities and added to investment trusts on attractive discounts (Woodford Patient Capital, ICG, Ecofin Global Utilities and Infrastructure). Finally, we added to our position in the AVI Japan Opportunities trust as the manager’s investment thesis of improvement in corporate governance in Japan appears to be gaining traction quicker than expected.

Vincent Ropers 30 Apr 2019
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