Lynx Prime Global Diversified Fof Comment - Sep 19
After a difficult summer for risk assets, investors returned from their holidays in a bullish mood and drove equities higher in September, leaving global equities broadly flat for the quarter. The quarter was marked by a continued slowdown in the global economic data, offset by further monetary easing from the US and Europe.
In the US, the Federal Reserve (Fed) cut interest rates in July and September in an attempt to prolong the economic expansion in the face of a slowdown in the pace of growth and hiring. While the economy continued to add jobs, the pace of growth of aggregate hours worked in the economy has slowed meaningfully. Consumer confidence also declined from elevated levels. US equities delivered 1.7% over the quarter in USD.
In Europe, the European Central Bank (ECB) responded to the weaker economic outlook by cutting interest rates further into negative territory, restarting quantitative easing and committing to continue with asset purchases until it achieves its inflation target. The ECB’s policy easing came against a backdrop of weakening growth, with the business surveys for September painting a picture of an economy that continues to slow, particularly in the manufacturing sector. With growth pushing in one direction and monetary stimulus pushing in the other, European equities delivered 2.5% over the quarter.
Of course, the trade war also continued to play a prominent role in financial headlines throughout the quarter. As things currently stand, further tariffs are due to come into place by the end of the year unless renewed talks between the US and China make sufficient progress. Failure to prevent further tariffs could hurt the global economy, so it’s set to be another quarter of carefully monitoring the developments on trade.
China’s economy continued to slow, with industrial production growing at 4.4%, down from around 7% at the start of 2018. Retail sales also slowed, to 7.5% from close to 10% in early 2018. However, with growth still comfortably above that in the US, and given that the US economy is also slowing as a result of the trade dispute and there is a US election next year, it’s far from clear that China will concede to US demands on trade.
Overall, the global economy faces several binary and highly unpredictable risks. Will the trade war escalate? Will a UK election lead to a no-deal Brexit? Will the recent tension in the Middle East escalate and cause another spike in the oil price? And will companies respond to slowing growth and profits by cutting jobs?
The uncertainties surrounding the China/U.S. trade talks, and to a lesser extent Brexit, dominate the outlook. Manufacturing is contracting globally, trade is weakening and corporate profits are under pressure. The U.S. yield curve is signaling that recession risks are increasing, and Chinese economic indicators are weakening. There is a risk that global uncertainties generate a self-fulfilling cycle where rising pessimism leads to less private-sector spending and higher unemployment. This in turn would cause lower profits and equity markets—and ultimately, deeper pessimism.
President Trump has a clear motivation to avoid a recession before the November 2020 election. China’s pain threshold is higher, but job losses and the threat of social instability provide an incentive to de-escalate the trade tensions and pursue domestic policy stimulus. However, it may take further equity market volatility to prod both sides into action.
We view the ongoing trade war as the most significant risk to the outlook. Although de-escalation makes sense for both sides, political uncertainties mean trade tensions have the potential to spiral out of control. Under that scenario, the yield curve will have correctly predicted a recession and equity bear market. On balance, we think it is more likely that the combination of trade-war resolution and policy stimulus will see the global economy recover in 2020 and why maintaining risk exposure will be important as “bull markets don’t die of old age they die because the Fed kills them” and this isn’t on the cards just yet.
The portfolio will primarily invest in a flexible combination of Rand denominated portfolios of collective investment schemes containing predominantly foreign securities in the equity, bond, money and property markets. The portfolio will be managed with assets being shifted between the various investment markets to reflect the changing global economic and market conditions, in order to maximise returns for investors. It will invest primarily in a range of portfolios or other forms of participation in collective investment schemes with a variety of investment policies, provided the inclusion of the portfolio complies with the requirements of the Act.
Investments to be included in the Lynx Global Diversified Fund of Funds, will apart from assets in liquid form consist of participatory interest of portfolios of collective investment schemes registered in the Republic of South Africa, or of participatory interest of portfolios of collective investments schemes or other similar schemes operated in territories with a regulatory environment which is to the satisfaction of the Manager and the Trustee and which comply with the requirements of the Act and any regulations thereto. The investment policy of all investments will comply with the investment policy of the Lynx Global Diversified Fund of Funds
The Manager will be permitted to invest on behalf of the Lynx Global Diversified Fund of Funds in offshore investments as legislation permits.