Trump turned up the temperature of the US-China trade war in May with threats of more tariffs. The markets took fright.
After a subdued month in April, how did the markets fare in May?
May was a dramatic month. It was all about US trade wars. At the start of the month, President Donald Trump tweeted that the US would impose extra tariffs on $200 billion of Chinese imports. That came as a complete shock to the markets because everyone believed the US and China were closing in on a trade deal. This was a big reversal.
Through the month, the tensions got worse. The US started to impose restrictions on US companies dealing with Huawei, the Chinese telecoms giant, which will have a big impact on companies such as Google. So far, the Chinese response has been muted. They have talked about drawing up a list of unreliable US companies, such as Fedex, and planning to restrict the sale of rare earth metals, where China is responsible for most of the global supply. That would hit US companies.
At the end of the month, the US turned up the temperature on Mexico by threatening to impose tariffs if Mexico doesn’t increase checks on illegal immigration. Tariffs have become more about politics than economics.
How did assets perform during the month?
Not surprisingly, it was a bad month for equities. Emerging markets fell 7.5%, emerging Asian markets lost 9%. Most significant was the loss in the US. The S&P 500 index of the US equity market declined by 6.6%. That’s the third worst return in the month of May since World War II.
If you look at smaller companies in the US, which tend to be more domestic-focused, they lost 9%. The investor mood was that increased tariffs will hurt growth in the US as well as in the rest of the world.
Europe fared somewhat better with a loss of about 6%. It was notable that the UK did quite well with a loss of 3.5%. (The UK market tends to be quite conservative during these kinds of selloffs, as is Switzerland – Swiss equities lost only 1.5%.)
It was a bad month for commodities as well. The oil price fell by 16% and base metals, like copper, lost 7%. Commodities traders are saying that the trade war isn’t good for global growth.
It was a positive month for government bonds in developed markets. That’s because there was a flight to quality. When investors are worried, they generally buy government bonds and that was the case in May.
What were the effects of the European elections and Theresa May’s resignation?
There is some concern that the next British prime minister will push for a hard Brexit. That has pushed down the price of the pound, though it has not had much effect on other asset classes in the UK.
The UK’s parliamentary arithmetic will not change, though, apart from perhaps by one seat due to the potential effect of a by-election in Peterborough, so the ability for a new prime minister to push through a no-deal Brexit is limited. However, these kinds of machinations do have an impact on the currency, so we can expect that volatility to continue, particularly against the dollar.
How did Nutmeg’s fully managed portfolios perform in May?
We hold a lot of US stocks in our portfolios and not as many stocks as normal in the UK. The US has high profit margins and has been the strongest economy in the developed world for some time. In contrast, the Brexit background has encouraged us to take quite low weightings in UK-listed stocks.
Our strategy has worked well in the last 12 months. US stocks have massively outperformed UK stocks in that period, though in May that strategy worked less well. That’s been a drag on our portfolios. Low risk portfolios lost around 1%, medium risk portfolios fell by around 2%, while the highest risk portfolio lost 4.75%. A lot of that loss came from US equities, technology companies in particular.
In this volatile environment, have you made any changes to the Nutmeg portfolios?
We made two sets of changes in May, which were all about reducing risk. After the Trump tweet, which changed the direction of the US trade talks, we decided to reduce risk by selling emerging market equities and Japanese equities. These asset classes are the most exposed to a slowdown in global trade. We put the money into bonds.
Later in the month, we also reduced our exposure to US technology stocks. We’re still very confident that the US technology sector will deliver strong returns. It has high margins that appear sustainable and strong sales growth. But we think it’s a good idea to be conservative at this point.
The Trump tariff talk may be all about posturing but, in the short term, we think markets will be volatile so it makes sense to reduce risk.
About this update: This update was filmed on 3rd June 2019 and covers figures for the full month of May 2019 unless otherwise stated.
Data sources: Bloomberg and 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 and future performance indicators are not a reliable indicator of future performance.