The Big Election Year
Our last monthly performance update was released on December 19th, just six days after Fed Chair Jerome Powell indicated it was safe to return to markets. This was following an incredible run for markets, with equities rallying, led by small caps and real estate pushing even higher since October 31st.
Since then (this update covers the period up to January 16th 2024), equity markets have had a somewhat choppy start to the new year following their strong gains at the end of 2023, and fixed income has followed a similar pattern.
It is geopolitical turmoil in the shape of armed conflicts and upcoming elections in the UK, the US and the rest of the world, which are behind many current news headlines. But will these events impact market and portfolio performance for investors?
For several years now, it’s the central bank narratives as much as the data that move markets rather than those of the politicians’ or even companies’ earnings results. Until we get at least close to the date of the US election, we don’t think anything will change the market moving forces; a Fed Chair Powell speech ‘trumps’ everything else.
Macro
Markets Are Heartless – And Why Its Dangerous To Try And Trade Armed Conflicts
We have commented before on the difficulties around investors trying to trade geopolitical events such as Russia’s invasion of Ukraine, and now, unfortunately, we have another new conflict in the Middle East. The Israel TA 35 has now recovered all the losses incurred after the attack by Hammas and their subsequent reaction to it.
As further evidence of the markets becoming immune to the effects of war, though often after initial falls, the Russian (MOEX) stock market is up over 40% in the twelve months to January 14th, compared to the MSCI World Index, which is up circa 12% over the same period.
Political Elections – Buckle up
Regarding the upcoming elections in the UK and US, the best thing for investors to do is focus on what will move markets and avoid getting overwhelmed by sloganeering, petty point scoring and the lowest common denominator politics. If the build-up to the last US election was less than edifying and somewhat depressing, unfortunately, we can expect worse in the months leading up to this one.
There is no space to go into depth here on the elections on either side of the Atlantic. However, we have run a straw poll with some of the fund managers who will be the most affected by any changes to economic policy following changes in their respective governments.
In summary, for the US election, whilst the managers are not unanimously fans of Donald Trump’s methods of governing, he is seen as being relatively market-friendly. In his last term, he brought in significant tax cuts, and even though many would say they were unnecessary, the markets didn’t care and inevitably rose. One wild card, amongst many, would be his approach to tariffs. The whack-a-mole implementation of them in his first term and accompanying inconsistent rhetoric make for genuinely difficult choices for companies and investment managers alike.
A second term for US President, Joe Biden, would likely bring more of the same policies as his first, but at some point, the massive US debt situation will mean spending must be reined in. On tariffs, some have commented that President Biden and Trump are not that far apart on policy, though both would vehemently disagree with such an assertion.
As for the UK election, well, this election appears to be less contentious than the previous one. UK managers viewed the potential impact of a Labour win under Jeremy Corbyn very nervously, with his rhetoric being seen as decidedly non-market friendly. Although a labour win is widely predicted this time, these same managers have fewer concerns about any market impact overall. That said, whoever wins the election will produce some new winners and losers. Still, the critical point is that the election result will probably be less market-moving than the potential outcome of the previous one.
One other election of note to mention would be Taiwan. Just over a week ago, Taiwan chose a new leader in the hardest-fought election in decades. But while the Democratic Progressive Party (DPP) held onto the presidency, the political landscape changed dramatically.
Taiwan’s current vice president, Lai Ching-te, won with just 40% of the vote — the lowest winning percentage since 2000. His ruling DPP also lost its majority in the legislature. Opposition votes were split between the Kuomintang, which failed to gain enough seats to control the assembly, and the upstart Taiwan People’s Party, which holds the balance of power.
The market reaction to this complicated outcome has been muted. We sense that if it weren’t for the actual conflicts that have broken out in the last couple of years, a potential Chinese invasion would be grabbing more headlines than it is now. We expect this situation to simmer indefinitely, and again, it’s wise to accept that nobody understands when or if an invasion will happen, or what the actual consequences will be. We know it would be a terrible outcome for world trade, and the effects on China would be highly economically damaging.
We will dive into this election a little deeper in our Investment Team Insight blog, due to be released next week, and look at how the new developments affect the sensitive, three-way relationship, between Taiwan, China and the US, as well as discuss the outlook for Chinese equities in 2024.
Portfolio Performance & Positioning
Coming into the end of 2023, every IA sector other than China was positive, with smaller companies in Europe, the UK, and the US averaging 14%+ returns over November and December. Money Market funds, which had garnered considerable column inches over the year, were left in the dust by equities, bonds, property and infrastructure.
In absolute terms, like most other managers, we benefited from the resurgence of risk assets. As we start 2024, the euphoria has somewhat dissipated, and the much hoped-for cuts to interest rates are being priced ever further out. We think the global economy will slow, but inflation will stay elevated, and that is not the Goldilocks scenario that many economists suggest may happen. In any event, our approach is to overweight those assets that look to have the best odds of appreciating and underweight those priced for perfection. This provides us with a lot of opportunities as we move through 2024.
The IBOSS aim is ‘To beat the relevant benchmark over as many periods as possible, with less than benchmark volatility and lower drawdowns, across all risk ratings‘.
During 2023, despite challenging market conditions for our positioning, the nine IBOSS Core MPS portfolios scored as follows:
- Cumulative performance – outperformed in 6 out of 9 cases
- Max Drawdown – outperformed in 7 out of 9 cases
- Volatility – outperformed in 5 out of 9 cases
IBOSS Start of Data Core Performance to 31/12/2023
For all its trials and tribulations against the 40-85 sector in 2023, which is hugely overweight US stocks, the overall characteristics of Core 4 remained strong, especially the defensive ones such as 29th percentile’ downside risk’.
In the long-term, other points to note are the excellent ‘max loss’ figures up to Portfolio 8, and that portfolio can be expected to have a slightly different profile given that it has a 98% equity weighting. The entire Core range exhibits Information ratios, which are within the top quintile, with portfolios 1 & 8 being first percentile.
Investor Outlook
Our outlook is very much centred around diversification. It is worth remembering that investor returns can come in short bursts, and markets rarely rise uninterrupted. We feel now more than ever that holding a diverse portfolio (inclusive of cash) is essential to ensure that clients’ portfolios maintain exposure to areas of opportunity, insulate them from some of the worst market moves and have enough dry powder to take advantage of new opportunities as they arise.
The working theory is that the current less clear market and interest rate direction should help active managers generate alpha over their passive peers, aiming to return purely the market returns. The additional level of safety we can bring to this assumption is our use of multiple active managers within each sector. There is an inherent risk in active management of being early or, worse still, wrong. Our strategy mitigates the overall risk, helps smooth the return profile and maintains the opportunity for collective outperformance. This approach has been central to our fifteen-year outperformance track record with lower drawdowns and sub-benchmark volatility.
Potential Risks
The conflict in the Red Sea has started to stir up fears that the diversion in shipping away from the Suez Canal, which is pushing up shipping costs, could boost inflation and cause supply shortages. So far, the impact has been significant but manageable, but we will keep an eye on the situation as it progresses.
It also remains unclear how easy it will be to reduce inflation to the 2% targeted by central banks. Longer-term sources of inflation pressure include deglobalisation, decarbonisation and ageing populations. If growth remained firm, inflation could quite conceivably rear its ugly head again.
Potential Opportunities
Overall, the global economic backdrop looks distinctly better than a few months ago. While much of this good news is priced in, we believe there are still opportunities to exploit – particularly in the cheaper areas of the equity markets. Whereas the US continues to look excessively expensive, other markets such as the UK and, to a lesser extent, emerging markets appear abnormally cheap. Small and mid-cap stocks also look good value, both here in the UK and the US. We continue to favour areas such as these where cheap valuations boost the potential upside.
As for fixed income, yields may be significantly down from their highs but remain the highest on offer for over a decade. And with yields likely to fall further as rate cuts materialise, capital gains should boost returns. At the time of writing (16/01/2024), there was a pullback in risk assets predicated mainly on the cautionary words on the potential for interest rate cuts from the Fed’s Christopher Waller. This interview coincided with several less than expected falls in inflation from the UK, Austria, and some Scandinavian countries. This is something of the reverse that transpired at the end of October last year when we had inflation news out of the US, which was then boosted by the Fed’s Jerome Powell appearing to sound all clear on future rate rises.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
Data is provided by Financial Express (FE). Care has been taken to ensure that the information is correct but FE neither warrants, neither represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Please note FE data should only be given to retail clients if the IFA firm has the relevant licence with FE.
IBOSS Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
Registered Office is the same: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.
IAM 12.1.24
