Chris Wyllie, chief investment officer at Iveagh, says the manager's Wealth Fund sold out of its last remaining gold holdings in the past month.
Chris Wyllie, chief investment officer at Iveagh, says the manager’s Wealth Fund sold out of its last remaining gold holdings in the past month.
We entered February with a degree of caution. Markets had run well, the UK FTSE 100 having had its best start to the year since 1989, and some of our sentiment indicators had turned red. Meanwhile, the Italian elections and US budget talks were plausible catalysts for a correction. It seems we needn’t have worried. Despite bad events in both Italy and the US, world markets wobbled but finished the month flat.
We’re not sure we are out of the woods yet, but it is encouraging to see that the markets have been able to absorb some pretty bad news in the shape of worst case scenarios for both the Italian elections (an austerity ‘thumbs down’ and political deadlock) and the US budget (‘sequestration’ spending cuts). This may well be telling us that there are still too many people waiting for a correction so that they can buy in – meaning the correction never comes.
Of course, event risk remains quite high, with political uncertainty on both sides of the Atlantic, and, although world markets were flat overall in February, there were some quite violent down days. This sort of pick-up in volatility can be a warning sign in itself. However, we don’t want to overstate the cautionary case, which is largely built on an assessment of market sentiment, which is fickle.
Investment Process Signals
Overall, our process signals remain positive over the medium term. In particular our growth models continue to point to mildly positive global economic momentum. The composition has shifted somewhat, with the US fading but Europe beginning to take up the running. At last we have six months of European growth acceleration, which doesn’t mean an expanding economy yet but it could mean the end of the current recession. Alongside positive scores for Asia and China, this all adds up to a well-balanced spread of global growth, even if its magnitude is still not that exciting. If this is right, one of the biggest headwinds for equity markets, a lack of earnings growth, should begin to abate, and the value compared to bonds will become more apparent. Meanwhile, most of the world’s major markets are displaying good technical patterns, with rising trends. All in all therefore, there is plenty by which to be encouraged, and if a proper correction does yet materialise, we would view it as a buying opportunity (along with many others, we suspect).
It was a comparatively busy month for us as a result of some precautionary steps taken at its start:
– We top-sliced our European equities to take us back to a more neutral position.
– We sold out entirely from JP Morgan Macro Hedge, a play on volatility which we view as a winning long term strategy but one which can suffer when short term volatility picks up (as was duly the case).
– We also sold the last of our gold, because we were worried about the downside risk if the US Federal Reserve decides to back away from QE (which is possible if our growth indicators are correct).
– We added 2% to US Treasuries and increased our exposure to the US dollar to 17.5% (we also have exposure to Euros, Yen and developing market currencies).
– Sterling was weak in the latter part of the month, so our FX positioning was positive.
– Cash balances rose to 11%, but we see cash as an unattractive option whilst real interest rates are so negative, so we don’t expect to stay at these levels for long.