Tactical Asset Allocator: shaken investors seek safe havens

Gold, property, bonds and the yen are all coming into their own after investors were unnerved by the volatility in equity markets over recent months.

Just one piece of encouraging economic news – the December US jobs report – was all it took to change the market’s mood and send stocks higher in the first few days of the New Year; but this recovery could easily prove a brief respite.

Last month, shares worldwide plunged on Apple’s meltdown, a profit warning from Delta Airlines, the prolonged US government shutdown and data showing declines in US car sales and factory activity at a two-year low. This reversed quickly, however, when the December US jobs report showed that 312,000 jobs had been added in the month, the highest number since February and well above predictions. It was an encouraging sign that investors seized on as proof that the US economy remains fundamentally sound.

Federal Reserve chair Jerome Powell further lifted the mood with a dovish speech indicating that the Fed will be flexible in its policy on rate rises if necessary.

The spike in oil prices was also taken as a sign for optimism, surging almost 10% between Christmas and New Year. But rather than reflecting a buoyant recovery, this was primarily a supply and demand story, as Opec cut production by 460,000 barrels per day in December – taking it to its lowest level in two years – and US oil production is much weaker than forecast.

The market’s mood could so easily change again, and very sharply. The Apple debacle has left investors well and truly shaken, and a host of global risks have yet to be resolved, including monetary tightening, trade wars and the prolonged US government shutdown.

The professional wealth management and hedge fund industries were wrong-footed all last year and particularly in the third quarter, with many hedge funds leaving the market. In fact, 2018 is expected to be revealed as the worst year for hedge fund performance since 2011. Such losses become a self-fulfilling prophesy, denting consumer and business confidence.

In the meantime, safe havens such as gold, property, bonds and the yen, which for so long have disappointed their bearish investors, have finally returned some profits. December, for example, was the best month for both gold and the yen for two years.

There are good reasons to expect these safe havens to continue to do well, too. Gold’s recent surge reflects the dollar’s deterioration and a paring back of expectations for rate hikes, as gold tends to fall during periods of monetary tightening because it does not bear interest.

Jerome Powell’s suggestion that rates may be kept unchanged through most of the year only increases the chances that the greenback will tumble further.

Risk-o­ff attitude

Trade war concerns and the government’s shutdown have also hit US Treasury prices and the risk-off attitude has spread. In Germany for example, 10-year yields are at their lowest in 26 months.

Over the past 30 years, whenever the yield curve (the gap between between two-year and 10-year Treasury yields) has turned negative, a recession has followed. The two-year/five-year Treasury spread turned negative in December, but is less keenly followed than the two-year/10- year spread, because the 10-year Treasury is the most liquid of the Treasuries and a good benchmark for the City.

Recent Fed tightening activity has echoed the lead-up to the dotcom bubble of 2000-01, with the same number of rate hikes over the same time period.

The really critical signal, however, will be any worsening in corporate profit expectations. If that happens then equities be terrifically expensive, despite the S&P 500 index having fallen about 15% from its September peak and dragged down the average price/earnings ratio from 33 to 28 in the process.

Apple’s 30% slide may not be as ominous as it seems, though. Apple chief executive Tim Cook has blamed a Chinese slowdown for poor iPhone sales, but the reality is a plateauing market. The debacle has dragged down other tech firms and retailers that generate a lot of their revenues in Asia, such as luxury brand Burberry. However, it has been obvious for three years that expensive smartphone sales are slowing across the board, and Apple is losing market share in Asia to more competitive rivals such as Huawei, Oppo, Samsung and Xiaomi.

Cook has grown revenue only by hiking the iPhone’s average sales price, and improving services such as music streaming, the App Store and iCloud. The innovations added to the iPhone, such as Face ID and faster chips, are simply not enough to entice new customers.

TheTactical Asset Allocator portfolio Feb 2019


Trading update

On the housekeeping front for this portfolio, Lyxor liquidated its FTSE 250 Ucits ETF on 6 December 2018 and automatically redeemed the shares, claiming scant demand for the product. This left us with a choice to reinvest in the FTSE 250 via a similar product, or contemplate a wider take on the UK market, such as a FTSE All-Share tracker. The FTSE 250 is not the complete play on mid-cap stocks it first appears, being 15% comprised of investment trusts with global exposures, such as Scottish Mortgage and 3i.

However, I’m looking to avoid the largest FTSE 100 stocks because of their concentration in just a few sectors such as oil and financials. For now, the iShares FTSE 250 ETF seems the better choice to benefit from the underlying domestic economy – which, despite Brexit, is still actually ticking along quite nicely.

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