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What we’re thinking about markets right now
A quieter month than the last one, and no changes to report after the recent rebalance. But a couple of things are worth sharing, because they’re the questions clients tend to ask.
A down month, handled well
September was negative for almost everything. Shares fell, bonds fell. Not dramatically, but there was nowhere much to hide.
Your portfolio came through it well. Both our funds are now ahead of their benchmarks over the month, over the year, and since we launched them, the first time that’s been true of both at once. We mention it not to take a bow, but because the way it happened is the point.
The defensive fund is the one to look at. It holds far less in shares than most of its rivals, and a good chunk in cash and very short-dated holdings. In a month when bonds were falling, that caution earned its keep: it fell far less than funds that simply hold a lot of bonds and hope. The quiet positioning that looks dull in a rising market is exactly what you want when the weather turns.
The thing everyone’s asking about
We spent a good while on a question we get a lot: isn’t the US market dangerously dependent on a handful of giant technology companies?
It’s a fair question. A small number of names now make up an unusually large slice of the US index, and if you strip them out, much of the rest of the market has had a poor time of it.
Here’s our honest view. High concentration and high valuations have come before every market wobble in history, almost by definition: a peak is a peak because a fall follows it. But that tells you nothing useful about when. People have been calling the top of these companies for years and been wrong throughout.
What we can do, and have done, is not be over-exposed. We deliberately hold part of our US allocation in an “equal weight” version, which waters down those giants, and we hold a decent spread outside America. So we’re not complacent, and we’re not up to our necks in it. We’re also not pretending we can pick the day it turns, because nobody can.
The recession question
Our rough gauge of US recession risk has fallen further and is now sitting more comfortably below the level we’d start to worry about.
The reason is simple: jobs. A recession that matters shows up as people losing work, and the US jobs market is currently very strong. Until that changes, and changes in a sustained way rather than one bad month, the rest is noise. There isn’t a flicker of it yet.
What changed at this meeting
Very little, which is usually a good sign, although two parts of the world are becoming interesting enough to act on.
The first is emerging Europe, which we're seeing as really an extension of our European holdings, a way into economies like Poland that look stronger than much of the core of the continent.
The second is Latin America, where an election in Brazil in the next couple of weeks may bring in a government business will find easier to work with, improving the backdrop for the next few years.
We'd rather wait for that result than chase a market that's already risen on the expectation of it, even if that means missing some of the early move. It would also add some useful exposure to energy and commodities, which a Brazilian holding brings with it.
In both cases we've agreed how and when we'd act rather than acting on a hunch now. Nothing is being rushed, and none of it changes the shape of your portfolio.
There’s a UK Budget in a couple of weeks too. We’ll say more once we’ve seen it rather than guess beforehand.
What this means for you
No rebalance this month; we did our annual one last month. No change of direction. A down month handled well, and a steady hand on everything else.
The dull truth is that most months, the right thing to do is very little, carefully. This was one of them.
Next Investment Committee Meeting
Our next meeting is on 20 November.