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MARKET OUTLOOK, JANUARY

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MARKET OUTLOOK, JANUARY

By Graham Bishop, Investment Director at Heartwood Investment Management 

The global economy benefited from a synchronised expansion in 2017 and momentum has accelerated over the last few months. While the legislative approval of US tax reform appears to be re-energising animal spirits, other forces are also playing their part: strengthening domestic growth in Europe, rising global capital expenditure levels, and the positive impact of stronger global demand for Chinese exports. Inevitably, questions are being asked about the sustainability of the current stronger global growth profile. We expect that a virtuous cycle of rising economic momentum, positive investor sentiment and supportive financial conditions will sustain the current cycle in the near term. In particular, US domestic growth prospects have been lifted by the temporary boost from fiscal stimulus, which arguably goes further than many had expected. While it is still early days, the impact of tax cuts is likely to be felt through higher wages and/or stronger corporate earnings.

However, we are also mindful that ten years on from the Financial Crisis this extended business cycle is reaching a mature phase. Several headwinds have held inflation down in the last few years, notably the euro sovereign crisis, which crippled demand in Europe, and tighter financial conditions in emerging market economies during the period when commodity prices collapse between 2014 and 2016. As these disinflationary headwinds diminish, we believe that the nature of the current extended cycle of low interest rates and low inflation is changing. Cyclical inflation pressures are rising moderately. While the boost from higher oil prices is likely to impact headline measures, the more important feed-through will come from the culmination of several months of strengthening global momentum. After all, in our view, inflation is a lagged a response to growth. Admittedly wage growth has been disappointing so far, but we expect that tighter labour market conditions will eventually produce higher wage pressures.

So it appears that we are entering a different stage of the cycle, likely to be characterised by more ‘normal’ conditions. Central banks are expected to stay on their journey of withdrawing emergency levels of monetary stimulus, as the regime shifts from quantitative easing to quantitative tightening. This expected reduction in excess liquidity growth is likely to present more challenges to markets further out, given its potential impact on earnings and sentiment. Moreover, despite the bond market’s recent revision towards a higher interest rate environment, we still believe that there remains a certain amount of complacency within financial markets. For example, financial conditions in the US have eased over the past year and there is still some way to go to normalise policy, especially if inflation rises as we anticipate.

We are therefore comfortable with maintaining our neutral exposure to risk assets. However, we also consider it to be appropriate to slightly reduce the cash position based on our short-term positive view. Rather than adding to equity risk, given the high valuations of some parts of the market, we are modestly increasing our commodity exposure to reflect our view of a reflationary environment. In our lower risk strategies, we are also modestly adding to short-term emerging market sovereign debt, which continues to benefit from benign economic conditions. Portfolios continue to hold a tilt towards the more value-orientated parts of the market, which we believe are positioned to withstand a higher interest rate environment. We are also sourcing diversified return streams from alternative assets, which should benefit from an environment of higher levels of market volatility.

Bonds: Inflation expectations are picking up and shorter- and intermediate-dated sovereign bond yields in developed markets are re-pricing to reflect a slightly faster US Federal Reserve interest rate tightening cycle. More focus is also being placed on the likely policy path of the European Central Bank, as its quantitative easing programme could end this September. The strong fundamental backdrop continues to support credit markets and, for this reason, we modestly added to emerging market sovereign debt. Overall, we continue to believe that developed sovereign bond valuations remain unattractive and maintain our short duration position. We are targeting ‘niche’ return drivers, such as asset-backed securities and infrastructure loans, until value returns to conventional credit.

Equities: 2017 ended on a strong note, with good news on the US tax bill adding support to developed markets. We continue to believe a modest overweight allocation to equities remains appropriate, mindful that the strong fundamental and liquidity backdrop are juxtaposed against the risks of high valuations and a lack of volatility. We are still not pushing for a shift back to UK equities at the expense of overseas, remaining underweight relative to other regions. We retain overweight positions in European and Japanese equities. We are neutral in US equities and remain comfortable taking a targeted approach to specific themes – healthcare, insurance and small cap. We continue to view our US exposure as a future source of funds on valuation grounds. Our emerging market equity exposure remains tilted towards Asia and we would view any pullback as an opportunity to add.

Property: The UK commercial real estate market ended 2017 strongly, having defied the Brexit gloom and continuing to attract the interest of overseas investors. We are comfortable maintaining our underweight position in UK commercial property, favouring a targeted approach towards long-term income strategies. Our preference remains for those sectors where there are supply/demand imbalances and are less exposed to broader macroeconomic events. While capital appreciation opportunities are diminishing given the maturity of the cycle, we continue to believe that UK commercial property offers attractive yields over UK gilts, which continue to be above historic averages in most sectors.

Commodities: We are increasing our exposure to commodities to reflect our more positive short-term view of a reflationary environment. While the oil price has seen a significant rally on a tightening supply/demand outlook, we believe that the fundamental backdrop remains supportive in the near term. OPEC discipline has been noteworthy and a higher oil price from current levels would be welcomed by Saudi Arabia given its growing fiscal deficit. Further out, we are mindful of the risks of US shale production resuming. Industrial metals are sensitive to rebalancing and deleveraging in China, but environmental controls introduce supply-side constraints which could be supportive to prices. Gold continues to play a protective role in portfolios in the event of any financial or geopolitical crisis.

Hedge funds: We made no change to our current allocation, although we expect more opportunities to arise owing to increasing monetary policy divergence and sector and stock dispersion. Our preference remains for macro/CTA strategies, as well as equity hedge strategies that have the potential to benefit from increased stock dispersion (i.e. between winners and losers).

Cash: We have slightly reduced our cash weighting, but continue to maintain reasonable levels of liquidity across our portfolios both in cash and short-dated bonds. Market volatility remains low – a situation that we believe is unlikely to persist as we move into the second half of the year

Investing

Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations

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Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?

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How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds

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Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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