As Europe basked in glorious summer weather, concerns over on-going trade disputes between US & China has decreased investor appetite in recent weeks. However, as the mid- term elections in America are scheduled to take place in a few months’ time and Trump is trailing in the polls, we feel that the rhetoric on trade disputes may well decrease in the coming months.
It is still hard to argue against holding good quality technology shares for the longer term. Results from the sector have been spectacular over many years, especially since 2007/8 and show few signs of abating. Moreover, technology is creeping into every facet of modern life and this positive tail wind seems unlikely to abate.
Whilst we acknowledge that there is always some froth in the tech space, especially around new issues, we are heartened by the fact that the market is willing to steadily reduce ratings on former darlings – such as Tencent, the well-known Chinese Group.
Closer to home, Switzerland PMI’s (Purchasing Managers Index) has been in fine form recently. A combination of a stable currency, a pro-business legislature, innovative management teams and a commitment towards investment in plant and equipment through capex, has in our view kept the orders coming in at a good rate.
Like attendance at a great party which went on way too long, bond investors in Europe and America are starting to take note of the rising risks.
As any self-respecting financial commentator will tell you, US rates have been rising for some time now as their economy booms and this higher cost of borrowing is being felt by borrowers and consumers. These groups include among their ranks, little known bond issuers from Latin America, Asia and of course Eastern Europe.
The first lesson is that in every decade since 1979, many investors have been attracted to high bond yields regardless of the risks and in the good times this works like a charm.
‘After all, (says the bond salesman), it’s yielding 5% and that is what you used to get for simple cash deposits, so it seems like a fair yield’. Like, but not quite. The lesson is of course just because you cannot see the risks does not mean they do not exist.
Most of the time bonds perform without too much volatility and seem safe. Safe that is until the investor notices that the bond price is falling sharply and what used to trade at $100 is now bid for at $78. Then, as in previous bond cycles, their investigation begins and the bond investor notices that there is speculation that their company is in serious trouble. Then comes the next big shock, there is very little liquidity in the bond (no one really wants to buy it) and with the benefit of hindsight the obscure Asian issuer no longer feels like a great place to invest.
At this stage investors tend to fall into 2 mindsets. The first group decide to hold on in the hope that the bond price will recover and sadly for many within this group the price keeps falling.
However, the second group decide to request a detailed review of all their bonds with an Investment Specialist and are able to decide based on careful financial analysis which bonds to keep and which to sell in order to protect their overall wealth.
As US rates are likely to rise over the next 12-24 months, we feel that this will put pressure on some Bond issuers. Moreover, if you are concerned over any direct bond which you have purchased in recent years, perhaps through another investment house, please do not hesitate to contact swisspartners.
In recent weeks, Emerging Equity markets have fallen sharply following renewed US trade sanctions against Turkey and concerns over the leadership of PM Erdogan.
As equity markets entered their Summer doldrums, America again voiced its displeasure that there has been no progress in recent talks to release an American Religious Pastor on what many believe are spurious charges of being involved in a coup attempt in 2016.
The talks appear to have ground to a halt for now but despite all the posturing some commentators are hopeful that a resolution can be found through the normal Diplomatic ‘ back channels’.
Amid concerns over Erdogan and the trade sanctions from America, the Turkish Lira has plunged over 40% this year and the ‘fear factor’ spread as Emerging Market investors displayed their usual ‘herd like’ mentality by reducing their equity exposures in certain countries. The exchange rate matters a lot in Turkey as it relies a lot on imports of products such as oil. This rise in the cost of imports has a serious knock on effect through higher inflation for local people.
Thankfully within our model portfolios we don’t have direct exposure to Turkish Bonds or Equities.
Furthermore, in our “swisspartners Emerging Market Opportunities FoF” we don’t have exposure to Turkey, Mexico, Russia or Brazil, whereas South Africa is quite underweight.
We do of course keep these relative positions under constant review and so if market conditions improve we may look to reduce these gaps, except Turkey. However, it is quite likely that we would take such actions in stages.
Written by:
Alan Kinnaird | Senior Portfolio Manager, Partner
Hakan Semiz | Partner
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