The Bird’s-eye View
This update covers the period up to August 14 2024, though as usual, we have taken the basic asset class chart (fig.1) back to the end of October last year, the latest full Powell pivot where he signalled victory over inflation and strongly suggested rate cuts were coming, and probably quite a few of them in 2024.
Since then, we have had a dialling down of expectations, so something like a soft pivot as the data once again tripped up the US central bank and rate cut expectations have considerably diminished. Despite unemployment remaining stubbornly low and inflation elevated, gold has continued to perform well, and gold-related investments retain their place in a well-diversified portfolio, not least for their low or even negatively correlated characteristics.
Asset Class Performance Since the Last Powell Pivot > 01/11/2023 – 14/08/2024 (fig.1)*
Macro
In our last monthly update, we said the eyes of the world were on the world’s biggest central banks to see if they would follow the path laid down by Canada and the ECB and start cutting interest rates. Just weeks later, the Bank of England cut interest rates for the first time since March 2020, dropping the base rate 25 basis points to 5%, and the US Federal Reserve is heavily expected to follow suit when it meets next month.
Staying at home, we also had data released showing construction was much more robust than forecast, so we see no evidence for the UK falling over anytime soon. Andrew Bailey has been very non-committal on the path for rates in the future, which is reasonable because, like everyone else, he is still trying to work out what a post-pandemic world looks like. We have been saying for almost three years now that we expect inflation to remain generally higher than in the post-Global Financial Crisis period. While we expect yields to fall in the short term, they will remain very volatile as the data fluctuates.
Outside of interest rates, the last month has seen considerable fluctuations in global equity markets after US recession fears were ignited following weaker-than-expected unemployment data. On August 5, Japan suffered its worst day of market falls since 1987 and the worst trading day in Japanese stock market history (fig.2). While the S&P 500 also saw a significant pullback, it’s worth noting that the index’s annualised returns for five years were markedly higher than its long-term average of 9%. The Japan story was primarily an idiosyncratic one and a response to the first-rate rise by the BoJ since 2007.
IA Japan vs. IA Global > 01/01/2024 – 14/08/2024 (fig.2)*
While fears of a recession were a much-quoted source of the volatility, August and September are notoriously the worst trading months of the year owing to the lighter trading. The big picture remains that several different things are coming to a head, causing a change in the guard to create new winners and losers.
Portfolio Performance & Positioning
While the current market conditions might be painful for investors with portfolios concentrated in a few sectors and geographies, they have been providing a tailwind for IBOSS’s portfolios on a relative basis. Since the tech rotation started on June 23, our medium-risk decumulation portfolio is 8th percentile, while our Passive and Core ranges are in the top quintile.
One factor helping towards this performance is our relatively overweight position in various income strategies versus many of our peers who remain overweight in growth funds. We are currently underweight in the more expensive areas of the US markets – which were those hit hardest by the sell-off – and we remain overweight in a broader basket of regions, including Asia and UK and European mid and small caps.
At the same time, fixed income funds have rallied, which has led us to reduce our cash position and hold more in bonds. Some time ago, we sold all of our passive fixed income holdings because we believe there are so many opportunities for active managers in this environment to trade the volatility. At the same time, with yields at 4% in the UK and the US, you can make a lot of money as an active bond manager.
Meanwhile, in February of this year, we increased our property exposure, which has come into its own. Looking at the last couple of months, the difference in performance between property and equities is about 6%, which is considerable and is just further proof of why we keep banging the drum about the powers of diversification.
Outlook
While we remain optimistic about the outlook for many asset classes, we do expect future opportunities to look markedly different from those of recent years. UK assets and much of Asia appear cheap relative to history, and small-cap stocks globally also look relatively inexpensive.
The key message is that investors are getting paid for diversification. While we are currently neutrally weighted in equities, despite volatility in the short term, we see as many tailwinds as headwinds for bonds and credit. Meanwhile, given that much of the bad news in property and infrastructure is now reflected in the price of those assets, they remain relatively oversold. We think they will continue to do reasonably well with few air pockets underneath them to overly concern us.
Interestingly, if you look at the headlines in the financial press, many people were talking about dumping bonds and going equities plus cash, which was perceived as a way forward. Instead, admittedly, only for recent weeks, you should have invested in bonds plus property, but they were the two asset classes that everyone had given up on. As the chart shows (fig.1), cash was attracting a lot of retail flows, which has been the laggard asset class. Many investors will always want to invest in what was working most recently, and the longer a phase, the more people will pile in. That is why we believe investors need a professional financial adviser to demonstrate that it can often be a strategy that can feel good at the time but can cost you in the long run.
*Information is short term in nature to demonstrate performance over a specific time period. Please contact IBOSS for long term data, including since launch and/or 5 years.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
Data is provided by Financial Express (FE). Care has been taken to ensure that the information is correct but FE neither warrants, neither represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Please note FE data should only be given to retail clients if the IFA firm has the relevant licence with FE.
IBOSS Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
Registered Office is the same: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.
IAM 166.8.24
