Nutmeg investor update: April 2019

Shaun Port


4 min read

Equity and bond markets produced solid gains in March. While the economic news continues to be relatively mixed, many central banks have signalled that they intend to take a sabbatical in 2019, holding interest rates steady through the year.

How did the markets perform in March?

Fairly well. If you look at fundamental factors, there really weren’t any backwards moves on the trade talks between the US and China. On the economic front, it’s actually pretty bad news in Europe. It looks as though the German and Italian economies have dipped into recession in the early part of 2019.

On the other hand, in the US, the economy looks a bit brighter. We’re also starting to see signs that the stimulus the Chinese government put in place is beginning to buoy the economy. So green shoots in China. Overall, the fundamentals aren’t brilliant, but it’s really the absence of new bad news, when the markets had priced in a lot already, that has given a bit of a lift to global stock markets.

That said, the biggest driver of markets in March were central banks. They’ve become a lot more sanguine about inflation and are not in a rush to raise interest rates. In particular, in the US, the Federal Reserve does not expect to raise rates in 2019. Whereas if you go back even six months, analysts were expecting four interest rate hikes – a 1% raise –throughout the year. So central banks are making a lot more comforting noises to financial markets. As a result of this, US government bonds returned almost 2% and global equity markets return just over 1%.

Overall, a reasonably good month for financial markets.

We’re in April and the Brexit deadline day (29th March) has come and gone and we’re still in the EU. What effect has all the political posturing had on the markets?

Obviously there’s a lot going on in the markets because of all the noise coming from Westminster, but it’s important to bear in mind that investors are always thinking about the different scenarios that affect UK assets, like the pound and UK equities. Prices reflect the combination of all the potential outcomes and their probabilities, whether that’s the chance of a no deal hard Brexit, or a Customs Union, or no Brexit whatsoever.

Through March, the pound fell – given what’s been going on in Westminster – by almost 2% against the dollar and that gave UK equities a big lift, particularly large companies with high overseas sales. So, the FTSE 100 returned over 3%, which makes the UK one of the best performing developed equity markets in March, so what’s going on in Parliament is not necessarily bad news for UK equities.

We still think the risk of a no deal, hard Brexit is still pretty low; while the chances of a soft Brexit, and possibly no Brexit whatsoever, are actually rising. So that would be very bullish for the pound, and very bullish for domestic UK stocks in particular. The probabilities are still moving around but we think that we’re moving much more towards a softer Brexit.

Given that, how did Nutmeg’s fully managed portfolios perform in March?

We saw returns of up to 2% in March. Interestingly, it wasn’t our highest risk portfolios that gave the highest return; it was our portfolios with risk level eight. This was because long-dated government bonds produced a really strong return, combined with the gains in equities, producing the highest gain. It’s interesting that bonds were quite a big driver of returns last month.

For the year to date, we’ve seen returns of almost 10%, so it’s been a very strong start to the year.

Has the investment team made any changes to the fully managed portfolios?
We’ve made several changes over the last month. Firstly, we’ve been reducing the amount of foreign currency we hold in portfolios. To give you a case in point, when we invest in US equities, naturally we take on US dollar exposure and in the case of a soft Brexit, or no Brexit at all, we expect the pound to rally, which would give you a loss on that foreign currency exposure.

We’ve also been increasing our exposure to smaller companies, particularly in the UK as the domestic market starts to recover once we get some sort of deal around Brexit.

And finally, we’ve added emerging market bonds to most of our portfolios, at the expense of some US and emerging market equities. It’s slightly lower risk, but you do get a good yield from owning these bonds.

Customer question

This month’s customer question comes from Ruslan on LinkedIn. Commenting on our Brexit coverage from 28th March, the day after parliament voted ‘no’ to every Brexit option on the table, he wrote:

“They said it’s the best time for the markets now. Better than playing at emerging markets. Agree?”

What’s your view on the balance between developed and emerging markets?

We hold a lot of emerging market equities at the moment and have done for quite some time. That hurt us last year, because emerging markets significantly underperformed as a result of the trade dispute between the US and China.

When you’re looking at emerging markets, you need to consider a lot of factors – it’s not just emerging market equities, it’s also currencies and the debt markets as well. There are a lot of opportunities, but also, a lot of factors to consider:

  • What’s happening in the individual economies?
  • How much risk is there?
  • What are the long-term trends, such as demographics?
    … a lot of factors to consider.

We think that emerging markets equities are still quite attractive; valuations are quite reasonable despite quite poor profit outlook. The currencies are particularly cheap, in some cases, very, very cheap, so it’s a good opportunity to get gains from owning the currency. Of course, when you invest in the equities, you get the currency as well – a double bonus if you like. In bond markets we’re receiving a yield of over four percent in hard currency emerging market debt.

We’re generally pretty optimistic on emerging markets and that’s because China is stimulating its economy, the US is not likely to raise interest rates any time soon and trade tensions are starting to dissipate. So the outlook for most emerging market assets is pretty good.

About this update: This update was filmed on 2nd April 2019 and covers figures for the full month of March 2019 unless otherwise stated. Data sources: Bloomberg, Macrobond

Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

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Shaun Port

Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.


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