As we bid farewell to this portfolio, we reflect on the fortunes of a key theme in the portfolio and flag up macro risks that investors will need to keep an eye on.
This is the last write-up on the tactical asset allocator portfolio, which has been running since 2013. The investment brief was to be cautious and diversified across asset classes, using exchange traded funds wherever possible, and to avoid being down across all holdings at any one time.
While the portfolio has only doubled in size over the five years since its inception, it has never been down by more than a few percent month on month, although the publication-date constraints of having to deal on one set day per month has limited its agility.
One recurring theme in the portfolio has been that emerging markets, such as those in the Bric group of countries (Brazil, Russia, India and China) will lead world economic growth in the future.
The portfolio has made profits trading into and out of many emerging and frontier markets over the years, but few of these trades have been as stellar as they perhaps should have been, given that emerging market economies were sometimes growing by 6, 7 or even 9% a year during that time.
One reason for this was that some of the largest emerging market countries, such as China and India, were fudging their GDP data substantially over the period.
Four economists at the Chinese University of Hong Kong recently published a joint paper that argues China overstated its annual growth rate by an average of 2% a year from 2008 to 2016. The economists used tangible data such as satellite imagery showing night time light levels (a proxy for electricity consumption) and railway cargo traffic, as well as data on tax revenue to calculate their own figure for growth in China.
They estimate that China’s growth rate last year was around 4% and not the 6.5% officially declared.
Commentator Michael Pettis also argues that China’s GDP is overstated by as much as 100%, as the government perpetuates the existence of “zombie companies” by granting them loans, which should in reality be written off as bad debt. China’s megacities, Beijing, Shanghai and Guangzhou/Shenzhen, offer fabulous investment opportunities, but swathes of the Chinese countryside remain impoverished.
Similarly, India reported 7.3% growth for 2018, but its former chief economic adviser, Arvind Subramanian, says the nation’s growth rate was significantly overstated between 2011 and 2017, and more like 4.5% last year than the official rate of 7%.
Disappointingly, Bric economy growth has slackened off to its slowest pace for five years, with output contracting in the first quarter of 2019. Brazil has yet to recover from its 2015/16 recession and Vladimir Putin’s stand-off with the West has reversed Russia’s progress towards building a market-oriented economy.
A similar pattern can be seen in the East Asian economies of South Korea and Taiwan. Both enjoyed a similar period of strong growth that shuddered to a standstill in the early 2000s as the legacies of labour control associated with the countries’ developmental states impeded the emergence of stable wage-led growth regimes.
This descent into declining output means investors can no longer assume emerging markets are no-brainer holdings for the long term.
Weakness in China typically spells trouble for Europe, as China is its key export market, but the outlook for Europe could be improving and – unloved as it is by investors – there could be opportunities to get in on the ground floor. Financials might become attractive. Low interest rates have deterred investors, but many banks offer handsome dividends.
Elsewhere, stockmarkets have repeatedly surprised on the upside this year. The S&P 500 index hit a record high in July, lifted by a softening of stances on both sides of the US/China trade war and a boost for chipmakers after Donald Trump agreed to ease the ban on US companies supplying Chinese tech giant Huawei.
This move to delay further tariff s and resume talks is only the start of the process, however. The rift between the US and China on intellectual property and technology is wide and will require sensitive negotiation.
The markets also liked the resumption in dialogue between Trump and Kim Jong-un on denuclearisation in North Korea, and the sight of the ‘leader of the free world posing’ on North Korean soil, although it’s doubtful that this posturing has any real substance.
Investors can take solace in the fact that 85% of the US economy is driven by domestic activity, but the tariff stand-off has dented business confidence and capital expenditure, the impact of which will emerge down the line. Moreover, the reduction in fiscal stimulus will stifle growth next year, and with the US budget deficit standing at $975 billion (£766 billion), the US Congress is likely to remain tough.
Weak factory reports in the US and across several major economies suggest that central banks will be forced to continue with loose monetary policy this year. It says a lot that Trump is trying to strong-arm the independent Federal Reserve into cutting US interest rates and at the same time telling anyone who will listen that the US economy is buoyant. US markets are now pricing in 75 basis points of rate cuts by the end of 2019, compared with zero at the beginning of May.
Across Europe, pressure from political movements – such as the populist coalition in Italy pushing back against the EU’s budget deficit limits and the gilets jaunes in France – are encouraging European governments to loosen the purse strings.
The good news is that inflation has remained strangely quiescent for this late stage in the financial cycle. In the past, a trade war and a dovish Fed would have been viewed as exerting inflationary pressure. However, factors such as intense competition in the retail sector, as internet shopping takes off, are adding to downward pressure on inflation.
The big question now is whether monetary easing will work as well in future as it has in the past. The banking system has been subject to a tsunami of regulation since the 2007/08 credit crisis, and the world now is a very different place from the world in 1995 when then-Fed chairman Alan Greenspan used rate cuts to lower consumer credit costs and boost growth in a much more robust environment.
Brash Brics supported solid returns
|Stock||EPIC||Category||Risk Level*||Quantity||Price paid £||Current price (£)||Cuurent valie (£)||Weighting (%)|
|iShares Euro Total Market Growth Large||IDJG||Euro Equity||104||325||18.14||35.41||11,506.63||5.65|
|Neptune European Opportunities||NEOA||Euro Equity||104||1,097||3.62||5.96||6,537.02||3.21|
|iShares Japan Sterling hedged ETF||IJPH||Japanese Equity||139||200||47.41||55.33||11,066.00||5.43|
|Standard Life Investments Emerging Market Debt||GU4Z||Bonds||81||1,300||5.15||7.98||10,377.90||5.09|
|DB X-Trackers DBX MSCI India ETF||XCX5||EM Mkts Equity||143||900||6.59||9.84||8,856.00||4.35|
|DB X-Trackers MSCI EM Asia Index UCITS ETF||XMAS||EM equity||129||420||24.12||39.47||16,577.40||8.13|
|iShares Global Clean Energy ETF||INRG||Global equity||n/a||400||3.59||4.99||1,996.20||0.98|
|iShares Physical Gold||SGLN||Commodities||n/a||300||18.26||21.88||6,564.00||3.22|
|Polar Capital Global Insurance fund||NAU4||Equities||116||400||5.35||7.51||3,004.00||1.47|
|iShares Automation & Robotics ETF||RBTX||Equities||n/a||1,000||4.66||6.07||6,072.50||2.98|
|JPMorgan Emerging Markets IT||JMG||EM Equities||138||1,000||8.46||10.24||10,240.00||5.02|
|iShares US Pharmaceuticals ETF||IHE||Equities||n/a||100||116.00||121.31||12,131.00||5.95|
|iShares S&P SmallCap 600 UCITS ETF GBP||ISP6||Equities||n/a||100||44.76||50.80||5,080.00||2.49|
|VinaCapital Vietnam Opportunity fund||VOF||EM Equities||143||1,000||3.58||3.43||3,425.00||1.68|
|Xtrackers S&P Select Frontier Swap ETF||SXFR||EM equities||128||500||11.72||12.66||6,331.25||3.11|
|Jupiter UK Smaller Companies fund||GB00B3LRRF45||UK Equities||113||1,000||4.06||3.88||3,882.30||1.90|
|iShares TIPS Bond ETF||TP05||Bonds||n/a||1,000||3.87||5.02||5,020.00||2.46|
|Fidelity China Special Situations||FCSS||EM Equities||217||1,000||1.97||2.23||2,225.00||1.09|
|iShares Digital Security||LOCK||Equities||n/a||1,000||3.59||4.17||4,170.00||2.05|
|iShares FTSE 250 UCITS ETF||MIDD||UK Equities||n/a||1,500||17.07||18.84||28,260.00||13.87|
|iShares MSCI Singapore ETF||EWS||Equities||n/a||100||20.58||19.71||1,971.00||0.97|
|iShares Core S&P 500 hedged||GSPX||Equities||n/a||4,000||4.98||5.44||21,760.00||10.68|
|Baillie Gifford Japan||BGFD||Equities||174||400||7.66||8.28||3,312.00||1.62|
|Jupiter India trust||B4TZHH9||EM Equities||173||2,000||1.18||1.23||2,462.80||1.21|
|Xtrackers Harvest CSI 300 China A-Shares ETF||ASHR||EM Equities||n/a||100||20.58||22.47||2,247.00||1.10|
|Cash (see below)||8,740.61||4.29|
Notes: Risk level is produced by FE Analytics and references the FTSE 100 as a benchmark of 100. * £10 standard interactive investor dealing charge and 0.5% stamp duty deducted from cash holdings on new purchases and sales. Cash at beginning of the period = £8,604.79. Dividends: Standard Life Debt fund GU4Z 1,300 x 1.361p = £17.69; 100 IHE x $0.535159 = $53.51 = £42.73; 400 Baillie Gifford Japan IT x 18.850p = £75.40. Total dividends this period = £135.82. Total cash at end of the period = £8,740.61. Source: interactive investor, as at 6 July 2019.