MRM Commentary


Monthly Investment Commentary


    Bond Yields

    Central banks are easing monetary policy once again. Bond investors see this as pre-emptive action ahead of a global economic slowdown, perhaps even recession, whereas equity investors anticipate this will fuel a pick-up in corporate profitability by boosting GDP growth. Time will tell, but for now bond yields are at new lows – the German and Swiss governments can borrow at a negative interest rate for up to 50 years.

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    MRM Portfolio

    US and China
    Economists struggle to quantify the lasting impact of existing tariffs ($250bn predominately on capital goods/industrial supplies/automotive), let alone those covered by the latest extension – the majority are consumer goods, which might have a more immediate impact on the US economy. The 7% year-on-year decline of Chinese exports to the US has been surprisingly low. This could mean the impact is predominately adverse sentiment surrounding investment decisions and raised costs rather than lost growth opportunities.

    Beyond China, we anticipate US challenges to countries that have benefited from trade diversion such as Vietnam and Europe. Trade tensions unfortunately aren’t limited to the US with the Japanese/South Korea dispute also escalating. An extended trade war, unrest in Hong Kong and Japan/Korea semiconductor tensions mean growth is slowing quite sharply in the rest of Asia. Japan has stabilized, however, with resilience in consumer spending offsetting negative net exports.

    Despite the noise surrounding trade, the Chinese economy continues to grow strongly. Annual GDP growth slowed to near 6% in the second quarter of 2019 – services remained flat at around 7% growth, while manufacturing slowed to 5.6%. We expect a similar performance in the second half of the year based on a resilient consumer and government incentivized infrastructure spending. Policy easing will continue in a measured way, partly through monetary measures but mainly from fiscal policy. Currency weakness could be used as a measure against tariffs.

    Meanwhile, US consumption rebounded in the second quarter, following the government shutdown and delayed tax rebates. Residential and business fixed investment languished however. The economy looks on track to grow 2.6%, a touch lower than last year but still well above the advanced world average. The growth in jobs is likely to slow while low levels of unemployment will likely keep wages growing at 3%+. Investors will be watching to see if higher labor costs can be passed on by price rises or whether competition forces margin compression.

    The Federal Reserve announced an end to its ‘quantitative tightening’ balance sheet reduction and cut rates by 25bp to 2.25% – the first cut in nearly eleven years – citing a mid-cycle adjustment and insurance against downside risks from weak global trade. While it is not clear whether easier monetary policy is necessary at this stage or will compensate for slowing global trade it does represent a dovish pivot by the Fed and markets anticipate further cuts.


    Markets have performed strongly year-to-date with US shares reaching a new high at the end of July. Investors have been prepared to look through the sharp deceleration in corporate profit growth in the expectation of an improvement in 2020 once supportive monetary policy kicks in. This optimism has pushed valuations towards the top end of their normal range, leaving them vulnerable to disappointing news. An estimated 3% increase in global earnings this year looks reasonable, but 10% growth for next year appears optimistic. We have become slightly more defensive in our stock-picking in recent months while retaining a focus on quality companies generating strong free cash flow.

    Source: Quilter Cheviot

    MRM model holdings as of June 30, 2019



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