Realm Investment Management Market Update – January 2019
Global equities fell in December with US/China trade tensions and concerns over economic growth being the focus. Government bonds rose along with the Japanese Yen and other safe-haven assets. In the U.S. the Fed raised interest rates as expected but revised their rate projection and now expects two rate increases this year rather than three. Steady economic and employment data indicate that a recession is unlikely to develop in the U.S. for a good while. Even so, following the recent sell-off many see equity valuations as attractive again with the recent de-rating, outside of a recession, the largest in the U.S. since 1994.
As a year, 2018 was a difficult one for investors. For the first time since at least 1972 no major asset class gained even 5% over the twelve months. At the start of this year though there have been some positive indications which we discuss below.
Every Monday in our Market View we publish our Market Timing indicators as weekly charts. Below we present the same indicators on a monthly timeframe to show more data and give a longer term perspective. Click on any chart to enlarge it.
Firstly, the UK Market Chart
The UK Market Chart has deteriorated in recent months. The Breadth Indicator, shown as colours on the price bars (top chart), is a negative red colour and the Momentum Indicator has now turned negative. We have been underweight UK.
The US Market Chart, below, looks more positive, but much less so than it did at the end of September.
Here, Breadth has remained negative (red price bars on top chart) and Momentum has rolled-over but yet to turn negative.
Next, we look at our Risk Barometers, again on the monthly timeframe.
Risk Barometers explained here
Firstly, the US
Again, there is deterioration here with the indicator turning down but it is yet to turn negative.
Our European Risk Barometer:
The Risk Barometer fell below zero at the end of November turning the price-bars red and advising caution. We are also under-weight Europe.
Brexit and the Pound
On Tuesday MPs rejected Theresa May’s Brexit deal by 230 votes. Jeremy Corbyn tabled a vote of no confidence in the government which the government survived on Wednesday. Theresa May urged MPs to put self-interest aside and “work constructively together” but the Labour leader has so far refused to take part unless the PM rules out a no-deal Brexit. She will publish a new plan on Monday with another vote penciled in for 29th January.
In our short email on Monday, before the vote on Theresa May’s deal, we wrote “the market’s reaction to risk events like this often confound expectations.” And that appeared to be the case; as the result was announced Sterling fell heavily and then immediately bounced back. This may suggest that the markets are less troubled by Brexit than most believe or that anticipated problems which could arise from most outcomes have already been priced-in. The one outcome that is probably not priced-in is a “no-deal” situation and markets see this as the most unlikely result with parliament united in its opposition. Even if that were to be the ultimate path that the UK takes then many believe the BofE would soften the blow by cutting interest rates and reintroducing QE. With time ticking away towards the 29th March deadline we are still dealing with multiple possibilities and uncertainty and so until there is more clarity we rely on our technical analysis to provide us with a view. As follows…
With regard to the Pound v US Dollar: as far back as our September update we wrote: “if the chart manages to spend time above 1.3200 it would imply further strength in our view and we would look to reduce our exposure either by cutting back on relevant funds or hedging.” The updated chart is below. You can see that in late September and again in October that Resistance level was tested but GBPUSD never managed to print time above it. From there it fell to the end of the year but has rallied back a little this month. Obviously with the ongoing Brexit uncertainty the Pound will remain volatile but we favour sticking with our view that until 1.32 level is overcome GBPUSD is in a weak long-term position.
We show below a chart of the U.S. Dollar Index, which measures the performance of USD against a basket of major currencies. The U.S. Dollar is a major influence on global markets and must be tracked closely.
In our November update we wrote “the dollar could falter, and we note that in the recent BoAML Global Fund Manager report, managers see the US dollar as overvalued. For the U.S. Dollar at least, managers have a good record of prediction and so their current view may indicate a turn lower.
The rally has faltered since that update but is currently still holding above that important level. A break below that point would indicate further weakness for the dollar which would likely give a relative boost to Emerging Market equities versus other regions, be a positive for commodities and lift U.S. large-caps stocks relative to small-caps. We will watch for that break but stick with our view that as long as the index holds above 94.80 we believe it is in a strong long-term position. It is also interesting to note that in the January BoAML Global Fund Manager survey, managers are seen to have reversed their opinion to such an extent that long U.S. Dollar is now the most crowded trade reported. The theme here in favour of the currency is the interest rate advantage of holding US dollars.
Also from the January BoAML Manager Survey we note that for the eighth consecutive month managers regard the trade tensions between the U.S. and China as the biggest risk for the market. The escalating trade war was a big theme for investors in 2018 but both sides are now under pressure to get a deal done. President Trump will want to calm the markets and carry a positive outcome into next year’s expected re-election bid. Trade talks in Beijing at the start of the month were viewed positively and it is reported that Chinese Vice Premier Liu may soon visit the U.S. for further negotiations so the chances of a deal are seen to have improved. Even so, it is far from guaranteed and a potential re-escalation remains the wild card in most manager’s view.
Finally, we take a look at Market Sentiment. Firstly, please remember that sentiment measures in investment markets are usually viewed from a contrarian perspective. In other words, following a sell-off you would look for very bearish sentiment readings to indicate a possible low for the market.
We have noted that recently a number of Sentiment readings have reached levels which have previously indicated capitulation. We show some examples below.
The Investors Intelligence poll measures the market sentiment of newsletter writers. The ratio of Bulls to Bears as measured by this poll recently fell below 1 meaning more Bears than Bulls. This is unusual and often marks capitulation.
The American Association of Individual Investors (AAII)
The AAII Sentiment Survey measures how bullish the public are regarding the Stock market. Recently this reading fell to a level that has often marked capitulation and a low.
The indicator on the chart below measures the flow of money in and out of Equity Funds (and ETFs) as reported by lipperusfundflows.com. The black line represents the net flow over a four week period and once again, we often see very large new outflows (fear) close to market lows. This number recently reached a historic -$93.3 Billion net outflow representing a massive exit of funds.
In summary, our sentiment indicators suggest that a low may be in for the market although our longer-term indicators and Market Charts need to improve before we could lift risk in our portfolios higher. There are some short-term technical improvements e.g. important levels for the FTSE 100 (6820) and DAX (10672) that we have mentioned in previous posts have been recovered and are now reference levels as Support. We will monitor the markets closely (as always) and if investment conditions change either for better or worse we will act swiftly.
We hope you have found this latest update of interest. Thank you for reading.
Disclaimer: ‘Where the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. The information contained within this communication is believed to be reliable but Realm Investment Management Limited does not warrant its completeness or accuracy.
This communication is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell investments.’