Diversification in a world divided…
Author: Ash Weston Head of MPS, 8AM Global
Market Overview
When looking at the global equity picture for last week – I’m reminded of the words of Charlie Chaplain;
“Life is a tragedy when seen in close-up, but a comedy in long-shot.”
When looking at the broad MSCI World performance from last week (our ‘long-shot’ to continue the metaphor) the world equity market was ‘off the boil’ to the tune of around -1.43% – far from a comedy… but given the last few years, I think we’d all class this as something akin to ‘business as usual’. What was most interesting to me was the view when seen in close up, highlighting the benefits of a globally diversified allocation;
Hang Seng: +3.79%
EuroStoxx 50: -0.32%
Nikkei 225: -0.81%
FTSE 100: -0.84%
S&P 500: -1.66%
NASDAQ: -2.51%
This is not to say “stick it all in China”, we all know that market is coming back from an extreme low watermark, but we’ve maintained our allocation to China throughout on the basis that, on balance of averages, Xi is going to do whatever it takes. Other managers will have diverse (and likely calcified) views on China, either going “all in” or removing exposure entirely, but since there is a huge glut of information both condemning and highlighting the opportunities we’ve simply made sure that we’ve;
- Had appropriate, but relatively neutral exposure.
- Ensured that any funds we hold in Global Emerging Markets and Asia are able to benefit from positive Chinese momentum proportionately.
Overall, this week’s events; from trade tensions and mixed economic signals in the US to inflation worries in the UK, reinforced a narrative of prevailing uncertainty. As all investors seem to be sitting waiting to digest and react to any crumb of data or information, I am reminded that portfolio diversification is the only ‘free lunch’ and that whilst the broad direction of travel for global markets remains positive, volatility is likely to remain at the forefront of the narrative.
Heightened trade policy uncertainty
Trump’s aggressive tariff rhetoric and recent policy “updates” kept investors on edge. His announcements: threatening higher tariffs on pharmaceuticals, semiconductors, autos and air fryers (probably) introduced a layer of uncertainty that weighed on risk sentiment, even as many of these speculative measures appeared to be priced in by the markets. This uncertainty contributed to uncertainty about global supply chains, corporate earnings and according to some, base assumptions about the future of North America’s relationship with Russia and most pressingly…everyone else.
China
Last week, President Xi convened a high-level meeting with key private sector leaders, including Alibaba co-founder Jack Ma and executives from Xiaomi, Meituan, and Huawei. This was widely seen as a clear signal that the government was stepping in to support private enterprise after years of strict regulatory scrutiny. The positive ‘vibes’ from the meeting boosted investor confidence dramatically, helping push the Hang Seng index up again. Whilst sterling investors in China are likely up around 50% over the last 12 months, where we go from here is largely dependent on whether any of this signalling can be transposed into reality.
Europe
With Germany’s national elections on the horizon, uncertainty about the formation of a stable government led to increased volatility among major European blue-chip stocks. Amid noisy global signals, investors turned to European stocks as they were seen as offering better value compared to their US counterparts. This renewed interest helped buoy Europe over the week, supporting gains despite tariff headwinds. This view is supported by our data having unwound our underweight position towards the end of last year on the basis of a number of momentum factors, but really summed up by the phrase echoed by many European managers “it can’t get much worse” thereby creating a great entry point for international investors.
Japan
Whilst suffering some of the same overarching fallout from the tariff rhetoric, the Nikkei 225 was protected to a limited extent by Japan’s Q4 GDP release at the start of the week unexpectedly growing by 0.7% quarter-on-quarter – far above the median 0.3% – marking the third consecutive quarter of expansion. Increases in consumption and business spending helps shore up the central banks case for interest rate hikes (remember in Japan we want economic growth andinflation).
UK
The UK recorded an unexpected jump in inflation to 3%, driven by higher transport costs, rising food prices, and the introduction of VAT on private school fees. As I’ve heard quite a few pundits mention already, the private school fees are very much a ‘one-off’ uptick… at any rate, this stoked concerns about domestic price pressures and added to the uncertainty around future interest rate moves.
In addition, Glencore, one of the FTSE100’s big-boy constituents, reported lower underlying profits amid falling commodity prices. The company hinted it might shift its primary listing away from London to a market where it could secure a better valuation. Again, this news rattled investors amidst all the other noise and tariff fears.
Finally, I occasionally glance at what is being added or taken away from the ‘basket of goods’ that forms the CPI (apparently based on consumer trends, but possibly also fiction) and was pleased to see that we have now included air fryers! Apparently around 30% of UK households own an air fryer and it’s a steadily increasing number…clearly we should look no further for the culprit of our stubborn inflation!
US Economic Data
The economic data released in the US during the week painted a very mixed picture. Retail sales in January experienced a significant decline, marking the steepest drop in nearly two years. This raised concerns about consumer spending and indeed the whole shape of US GDP more broadly. Meanwhile, the purchasing managers’ index (PMI) readings for manufacturing and services provided early indications of a modest rebound in production, though not nearly enough to offset the negative sentiment created by the sales data. Both these points, sparked debate over the Federal Reserve’s future policy decisions, some analysts saying this could lead to more cuts and others saying the Fed will hold firm with fewer cuts. Speculation and positioning around Fed policy decision-making via crystal ball continues!
Summary
None of these market events are ‘unknown unknowns’ and the narrative sits quite comfortably in the ‘continuation of existing trends’ bucket. The message for clients is clear; short term volatility, especially when it’s a continuation of known themes is good. It adds additional data for us to use when categorising and monitoring funds, improving our dataset and, our mandate to tactically tilt the portfolios based on data, the overwhelming probability of events unfolding and to create a stable, diverse base will result in consistent (and expected) relative return over shorter, volatile periods.
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