Although the year is still young, thus far into January markets have seen a broad continuation of the trends we observed in Q4 of 2019, and indeed for many of the last few years. US Equity outpaced other global markets by quite some margin, with the S&P 500 returning +2.21% in Sterling terms; although this was aided by a mild weakening in the British Pound against the US Dollar. The Price/Earnings ratio for the S&P 500 now stands at 26x on a trailing 12-month basis, as calculated by the Wall Street Journal, that is very expensive indeed on this measure.
Global growth equities have continued to outperform value equities (+5.8% vs +2.6% for the month to date), as they have done in the aggregate since the financial crisis. Again, valuations are stretched to extremes – although we generally view stretched valuations as opportunities to add value rather than risks to be avoided. As a result, we maintain our overweight to Global Emerging Market Equity into the New Year as it offers considerably better value than other equity markets.
On the Fixed Income side, we saw the rally in junk (or high yield) bonds extend from December into January as Global High Yield Debt rallied +0.9% in GBP Hedged terms last week. We are deeply sceptical that there is any opportunity to be had in high yield at current prices and maintain our underweight in favour of Investment Grade Credit. Emerging Market Local Currency Debt, which was one of our most successful positions last year, has pulled back marginally this month (-0.30%) but we remain bullish on the asset class in general and our Fund manager in particular.
On the macro side, we track the Composite Leading Indicators produced for each major economy by the OECD on a monthly basis. The latest data was released this morning and showed a moderate stabilisation in economic data across a range of developed and emerging economies. One among these was the UK, which is interesting in the context of a potential rate cut by the Bank of England. This would be highly premature in our opinion. Employment data is still robust, and while retail sales have been poor in aggregate, most of this is due to business models on the high street being disrupted rather than an underlying economic malaise.
We continue to remain focused on only taking risks for which we are adequately compensated, monitoring market developments for when trends might begin to turn and looking for tactical opportunities to add value to the portfolios.
