Nutmeg investor update: December 2018

Shaun Port


5 min read

November followed one of the worst months on record for equity markets. Although the damage wasn’t undone, there were some more positive signs toward the end of the month as attentions turn to 2019.

Markets had a really difficult month in October, how did they fare in November?

Yes, October was a very tough month. Through the month almost all equity markets fell by more than 10% at some point, although they did recoup some of that loss towards the very end of the month.

In November, equity markets remained volatile, but investor nervousness also spread to other asset classes. For instance, high-quality corporate bonds in the UK lost 1.2%, and European high-yield – or ‘junk’ – bonds lost 2%. In commodity markets, the oil price fell by 22% – the largest fall in 10 years.

In stock markets, European equities experienced a loss during November, while US and emerging markets grew by around 2%, most of which was concentrated in the final week of the month.

Why did US and emerging markets perform better in November?

One of the few fundamental reasons for the volatility we’ve seen in the past two months has been expectations surrounding US interest rates. On October 3rd, in unscripted comments, Chairman of the Federal Reserve, Jerome Powell, said that interest rates were a long way from neutral. In other words, that interest rates would need to go up a lot further and a lot faster than had been expected. This clearly spooked investors, particularly those investing in growth stocks, such as US technology companies.

In his more recent comments from November 28th, which were very carefully scripted, he said that interest rates were in fact very close to neutral, implying that interest rates would increase by 0.25% in December and then the pace of interest rate growth would slow into 2019.

These comments have really helped calm investor sentiment. Since inflation appears to have peaked and the price of oil has dropped so much, the Federal Reserve has more breathing room to take time with raising interest rates through 2019.

This has been a big reason why markets had a good last week of November. Leading into December, President Trump and President Xi came to an agreement to call a truce on the trade war between the US and China for 90 days. We can’t say for sure how this truce will play out over the next 90 days, but this trade tension has been a big cause for the volatility we’ve been seeing in markets. If we see progress toward a resolution for that issue, we could see markets begin to stabilise.

So that’s the global picture, but what about the UK markets?

The UK equity market had a relatively good October, outperforming global equity markets. That’s because the UK market tends to be quite defensive and has quite a low weighting in technology compared to other markets.

In November, that picture reversed. The UK equity market lost 2%, which is partly due to the EU Withdrawal Agreement negotiated by Theresa May. The consensus view is that the agreement won’t pass parliament at the first vote, and this is causing some uncertainty.  The UK market is also more exposed to energy stocks, so there was a big impact from the drop in the oil price.

UK government bonds lost 1.6%, so overall, not a good month for UK assets, after a comparatively good performance in October.

So how have the Nutmeg fully managed portfolios performed?

Portfolio performance was mixed in November. The low risk portfolios felt the losses in government bonds, leaving losses of up to 0.2% in the month. Higher risk portfolios benefited from the bounce in US and emerging market equities, but experienced a drag from European equities. They didn’t recoup the losses from October, but achieved growth of up to 0.6%.

And how have the Nutmeg socially responsible portfolios performed?

We launched our socially responsible portfolios on 20th November, but we’ve been managing these for our staff accounts for the past few months.

These portfolios performed quite a lot better than our fully managed portfolios in November. There’s a few reasons for this. An important one is that the portfolios have a lower exposure to carbon output, and so the sharp fall in oil prices had less of an impact.

Also, the socially responsible portfolios don’t hold some of the big tech stocks that experienced the worst performance last month.

It’s also important to highlight that we would expect quite marked month-to-month differences between our socially responsible portfolios and our other managed portfolios, but over the long term, we expect performance to be quite similar.

Have you made any changes to the fully managed or socially responsible portfolios?

We haven’t made any changes. We think that, through the rest of the year, Brexit headlines are going to be front and centre, driving the prices for UK assets in particular. We don’t think Theresa May will get the EU Withdrawal Agreement through parliament on the first try, but we think the risk of a hard Brexit is very low. We think the UK could end up with something ‘softer’ than this agreement, perhaps similar to the deal Norway has, or even a second referendum. The volatility will continue to affect UK assets, including the pound.

Outside of the UK, the investment team is focused on what’s going to happen in 2019 and 2020. Trade relations between China and the US are showing the initial signs of improvement, although we’ll continue to monitor this closely.

But overall, equity markets look cheap. Developed markets outside the US are the cheapest we’ve seen since June 2013 and emerging markets are the cheapest since 2014. We think the portfolios are well-positioned heading into next year.

Customer question

This month’s customer question comes from Charlie via Twitter. He asks:

“How can I, as an investor, be sure that the team are paying equal attention to the returns of the new SRI portfolios as they are to the mainstream managed portfolios?”

Good question, Charlie. It’s important to say that we have one investment process, designed by our in-house investment team. So, if we were to prefer American companies over Japanese ones, for example, this would be reflected across all the different managed portfolios.

It’s the way this is implemented that might differ. It’s very likely that we would use a different ETF (exchange-traded fund) to deliver this for socially responsible portfolios than for our other managed portfolios.

It’s also important to note that we’ve signed up to the United Nations’ Principles for Responsible Investment (PRI). This means we’ve committed to embedding environmental, social and governance (ESG) factors into our investment process, and not just for our socially responsible portfolios.

And finally

The start of December has seen increased market volatility, with markets rallying following apparent easing in the US-China trade hostilities early this week. However, a number of political and financial pressures have resulted in a more difficult end to the first week of the month. You can keep up to date with developments since this investor update was filmed on our blog.

About this update

This update was filmed on 4th December 2018 and covers figures for the full month of November 2018 unless otherwise stated. Data source: 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 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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