Strong performance in turbulent times!

Tuesday 01st October 2019

Strong performance in turbulent times!

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Article By Brooks Macdonald

Strong performance in turbulent times!

It has been a strong year to date for both the IFSL Brunsdon Adventurous Growth Fund and the IFSL Brunsdon Cautious Growth Fund, with both ahead of their respective benchmarks.

Mark Shields is Investment Manager with the Multi-asset team at Brooks Macdonald, responsible for the management of both the IFSL Brunsdon Investment Funds. Here he provides a background geo-political and investment strategy perspective to the Funds’ ongoing strong performance.

“We continue to see markets in mid-cycle not late-cycle, with employment and consumer data supportive. There is still an absence of inflationary pressures in aggregate and this is providing room for central banks to maintain an accommodative stance. However, with the year-to-date equity returns having been driven by market hopes around the pace and scale of forward-looking central bank easing hopes, we do recognise the risk of a mid-cycle correction, especially for the bond market. We recognise the weaker industrial trends when looking at Purchasing Managers Indices for Manufacturing relative to Services, but at a global level these are still balanced, currently around neutral for manufacturing and still expansionary for services. While we continue to watch for any macroeconomic changes, such as unemployment, inflationary pressures, credit stress and market volatility, we do not currently see the necessary conditions that would shift us from our mid-cycle narrative. We have allowed cash to build up in both the IFSL Brunsdon Investment Funds and this should allow us the opportunity to take advantage of any market correction should we wish.

“During the past few weeks we have seen a welcome moderation of some of the geopolitical risks that we have been keeping a close eye on. The US & China have agreed to return to the negotiating table for high-level talks in October together with a postponement of some tariffs. Italy has seen a new government coalition of Five Star and the more market-friendly Democratic Party and in doing so side-lined Salvini’s League Party giving hope for the upcoming 2020 budget negotiations with the EU in October. In Asia, Hong-Kong tensions have eased slightly with the withdrawal of the controversial extradition bill. Closer to home, Parliament has moved to block a no-deal exit from the EU on 31st October. However, slightly offsetting this reduction in risks has been the recent flare-up in the Middle East with tensions with Iran once again spiking. At the moment the US seems to be taking the more intelligent route via the increased use of sanctions rather than a more military based option.

“Turning back to the bond market, we have held the view for some months now that the signals coming from the bond market (flat yield curves and temporary inversions seen during August) were not necessarily reliable indicators for recession. Instead they likely reflected the distortion from central bank action in their respective sovereign bond markets. Supporting this, since late August, as the market has moderated its expectations around central bank easing, especially post the latest ECB meeting, the global stock of negative yielding debt has seen a material pullback, from $17 trillion at peak end August, to under $13.5 trillion currently. At the same time, bond prices have corrected, whereas equity markets have remained upbeat with MSCI USA close to all-time highs. We have kept our underweight to fixed income assets in the IFSL Brunsdon Cautious Fund with a preference for equity and alternative low correlation assets.

“For the UK we continue to see Brexit negotiations outweighing the valuation and yield attractions for the time being. Whilst Sterling at around 1.24 versus the Dollar has lifted from its sub 1.20 September lows, until we see more confidence and clarity in the nature of the UK’s future relationship with the EU, we continue to keep an underweight stance on UK risk assets. Following our reduction in exposure to UK smaller companies earlier on this year we do not currently have plans to re-allocate to this space until the political situation becomes clearer.”

Source: Brooks Macdonald

Please note that past performance is not a reliable indicator of future performance. The value of your investment and any income from it can go down as well as up. You may not get back the amount originally invested. Please also note that tax treatment depends on individual circumstances and may be subject to change in the future. Changes in rates of exchange may have an adverse effect on the value of an investment. Changes in interest rates may impact the value of fixed interest investments within the fund. The value of your investment may be impacted if the issuers of underlying fixed interest holdings default, or market perception of their credit risk changes. The information in this article does not constitute advice or recommendation and does not form part of any contract for the sale or purchase of any investment.