Nutmeg investor update: February 2019

Shaun Port

read 5 min

Global stock markets fell by 7% in December but rebounded by over 8% in January. While a 3% gain in the pound took a bit of shine off that return, markets have shaken off a difficult end to 2018 and it’s been a great start to the year.

Some of the uncertainty stemming from the global sell-off in late 2018 stuck around as we moved into new year. Did the mood in the markets improve as January went on?

The mood did brighten, thankfully. Last month, we looked at how extreme the sell-off in December was, highlighting that it could only really be justified if the US economy was headed into an imminent recession in 2019. And to us, that really was a big ‘if’.

It’s something we really didn’t – and still don’t – believe is on the horizon.  So far this year, economic data and company results have been quite positive on the whole. The slowdown in China and Europe has not got a lot worse, the US economy has had a bit of rebound and is still looking quite strong, and company results have generally been a bit ahead of expectations. Certainly, fundamental economic factors are not shown any signs of the kind of disaster predicted by the fall in equity markets in late 2018.

On top of this sense of relief that the fundamentals hadn’t deteriorated, the US Federal Reserve also had a big change of policy at the end of January. The committee that looks after monetary policy said that interest rates would effectively be on hold for some time and it also expects to slow the pace of unwinding its bond buying programme. This is the policy it put in place some time ago to support the recovery after the financial crisis.

This is very positive news for investors, particularly when you remember that some economists were forecasting a further four rate hikes in the US this year!

So how did markets perform in January?

There was a large rebound in stock prices in January, as a result of that sense of relief.

In December, we saw a 7.2% drop in global equity markets. In January, we saw an 8% rise, so a significant bounce-back.

As a generalisation, equity markets and other asset classes that suffered the most in December had the biggest gains in January, including small companies and emerging markets.

That means the markets that had more limited falls, had more limited rebounds. The UK is a good case-in-point. UK equities fell by much less than global markets in December, returning 4% in January – comparatively lower than other markets.

Also, bond markets had a good month. Fixed income holdings produced gains in January, backing up a good month in December.

How did Nutmeg’s fully managed portfolios perform?

Given the strong performance across equity markets, we saw gains across all our portfolios. Portfolio performance ranged between around one and one-quarter of a percent for risk level 2, up to just under five-and-a-half percent for level 10 over the month, which almost fully reversed the December losses.

Looking at a longer period, half of the loss from the high-point reached at the end of September has now been recouped.

And have you made any changes to the fully managed portfolios?

For medium and high-risk portfolios, in early January we added some more exposure to smaller companies in the US and the Eurozone, given the much sharper sell-off in these companies.  Since then, the prices of smaller company shares have risen faster than large companies.

Brexit is still dominating the news agenda in the UK. How much attention should we be paying?

Given the 29 March deadline, it’s not surprising that most of the UK news is focused on Brexit.  But it is not always the case that this ‘noise’ moves markets. Instead, it is how investors judge the changing likelihood of the different scenarios that could play out.

At Nutmeg, our investment team has been tracking the likelihoods of different Brexit outcomes since the referendum and we’ve been positioning portfolios accordingly, so our customers don’t need to worry at any point during the process.

Looking at where we stand now, sterling rallied quite strongly in early January as the risk of a hard Brexit seemed to recede. Meanwhile, the possibility that we could end up with no Brexit at all – albeit a very small chance – has started to be factored in.

Our view is that the chance of hard Brexit is still very low, but the likelihood of an extension to Article 50 seems to be rising. The extension might only amount to a few months, but as each day passes without firm progress, its increasingly unlikely that all the UK legislation required can be passed before 29 March.

Customer question

This month, we’re tackling two customer questions on a similar theme, both from Cem on Twitter. He asks:

“Would you advise having multiple direct debits into the same pot to iron out changes within a month, rather than lumpy deposits?”

Having multiple payments during a single month is a bit unnecessary, but when deciding whether to put money in as a lump sum at one point during a year or feed it in through a Direct Debit payment each month, we think it makes sense to pay in monthly. This is because, in rising markets, you would then benefit from getting to the market earlier, and in falling markets, you’ll be buying in at lower level each month the markets are down.

In any case, it’s good investing practice to get comfortable with making regular contributions as it’ll help you navigate through the natural ups-and-downs in the markets and ultimately stay the course to meet your long-term investment goals.

“Are 3 pots 1/10 10/10 and 5/10 more likely to iron out downside whilst giving upside rather than simply having one pot at 5/10?”

We offer the functionality to split your investments into different pots with a view to helping you pursue different investment goals – if you have more than one, that is.

Having the chance to set a different investment timeframe and risk level for different pots can help you logically plot your way towards goals based on their characteristics.

For example, if you’re pursuing a long-term goal like retirement – assuming your retirement is still some distance away – you might be better able to take more risk with this money as you don’t need it imminently. If you’re planning to buy a house in the coming years, you might want to reduce the risk you take since you’re getting closer to needing the money.

In terms of how your money is invested in these different pots, they all still conform to our single overarching investment strategy. We adjust the asset mix to meet the amount of risk you want to take with that particular pot.

As such, there’s no need to split your money across different pots with different risk levels if you’re pursuing the same goal.

About this update

This update was filmed on 6th February 2019 and covers figures for the full month of January 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 performance and forecasts are not reliable indicators of future performance.

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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