Nutmeg investor update: March 2019

Shaun Port

read 5 min

Markets performed well in February, as investors took confidence from signs that trade tensions between the US and China had eased. Brexit news also had a noticeable impact on financial markets here in the UK.

It was great to see a sense of relief in the markets in January, following such a difficult end to 2018. Did it carry through into February?

That sense of relief did carry through to February, following on from the big bounce in equity markets in January.

This is being driven on by investors’ beliefs that there’s been some progress in the trade talks between the US and China. There’s not actually much evidence that there has been any progress – we’ve had some tweets from President Trump and a few statements from policymakers in the US and China, but not much concrete evidence.

What we know for sure is that the US hasn’t implemented the 25% tariff on all Chinese goods as it had promised to do from 1st March. So, there’s a sense that there’s a truce in place, and that’s given investors confidence that we’re not heading into an imminent trade war, the threat of which had been hanging over the markets for much of last year.

Developed stock markets returned 3% in February, building on the strong gain in January, but emerging markets had a tough month, returning only 1%. Strong gains in Asia, particularly China and Taiwan, were offset by losses in Latin America, while the UK market gained just over 2%.

So, what’s the outlook for equity markets now we’ve had this large bounce?

In a sense, it’s all about relief, rather than investors being particularly optimistic about the outlook. Already, investors have priced in a weaker global economy, particularly in Asia. They’ve also priced in lower company earnings – potentially no growth in US earnings this year. So, there’s a lot of bad news already in the markets.

Interestingly, investors haven’t really been putting money into the markets, in fact, they’ve still been taking money out of global stock markets this year after a really big withdrawal toward the end of last year.

So, there’s not a lot of enthusiasm even though most equity markets outside of the US look quite cheap. That gives us confidence that equity markets can continue to produce good gains, even though there’s a lot of pessimism around – we feel this pessimism is largely priced in.

We’re still overweight equities as we feel we’re still going to get good gains from here onwards.

There were some important Brexit developments in February. What were the outcomes for the markets?

Under pressure from MPs, Theresa May has agreed to three consecutive votes. On 12th March, there will be a new vote on the Withdrawal Agreement, potentially with some changes if the EU agrees to them. If the Withdrawal Agreement doesn’t pass, on Wednesday 13th, there’s a vote on whether to rule out a no-deal Brexit. And on Thursday 14th, there will be a vote on whether to extend Article 50 for a few months, or potentially longer. There’s also the possibility that MPs will push for a vote on whether to have a second referendum. So, lots going on, and a lot for the markets to digest.

Given there appears to be some progress towards a deal, and the small possibility of a second referendum has risen, the pound rose strongly in February – gaining 1.9% against the euro. This had a knock-on effect for equity markets. Companies with high international earnings have seen relatively poor performance, while UK domestic-focused stocks have produced strong gains.

In all, there’s been a fair amount of news that moved the markets in February.

How did Nutmeg’s fully managed portfolios perform?

All managed portfolios made gains in February, of up to 2%. Medium risk portfolios gained around 1-1.25%, while our lower risk portfolios around 0.75%.

We’ve had solid gains in equities through February but that was somewhat offset by the rise in the pound. That’s depressed our portfolio returns from overseas equities.

Emerging markets were a bit disappointing in February, where we’ve got a significant holding. On the positive side, our holdings in small companies did particularly well, although they make up a smaller component of our overall holdings given that they’re higher risk relative to larger companies.

In bond markets, UK government bonds or gilts lost almost 1% in the month, which is quite a big loss for bonds. But because we’re quite conservative in the way we’ve been managing bonds, we only saw small losses in our portfolios. Our corporate bonds produced some small positive returns.

Overall, portfolios have managed to recoup most of the loss we saw in the last few months of 2018, so it’s been a really good start to the year.

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

In advance of Theresa May capitulating to pressure from MPs on Brexit, we made a few small changes to our UK holdings. We’ve added more small company holdings and reduced our exposure to foreign currencies to take advantage of what we see as progress towards a softer Brexit.

Customer question

We know Brexit is on everyone’s minds at the moment, and many of our customers are asking about it. With the intended Brexit date of March 29th just three weeks away, we wanted to use our usual customer question slot to look at Brexit in more detail.

Where do we stand at the moment, and what’s the team’s view on the likely scenarios?

The investment team discuss changes to the Brexit dynamics almost every day, keeping an eye on the political and economic implications as the agenda shifts.

The key development this year has been that the likelihood of an extension to Article 50 has increased significantly. We think the probability of an extension is now almost as high as parliament passing the Withdrawal Agreement before 29th March to enable the UK to leave the EU on the intended Brexit date.

Our central scenario now is that the Withdrawal Agreement will be passed, but with a short delay – perhaps a few months, rather than the 21 months that the EU is suggesting will be needed.

As such, our portfolios are geared towards a soft Brexit, as it appears parliament would effectively stop a hard Brexit from happening. Our fully managed portfolios are positioned for the conditions we expect following a soft Brexit – a stronger pound, the likely under-performance of large exporters which make up a big share of the FTSE 100, a rally in small companies (FTSE 250) and a fall in the prices of UK government bonds.

We’re yet to see what shape a future agreement between the UK and the EU could look like, and it could potentially be even softer still – perhaps a Norway-style agreement – and that would also likely boost the value of the pound further.

We’ll continue to keep you updated on our Brexit outlook and what it means for your portfolios in future updates and on the blog.

About this update 

This update was filmed on 5th March 2019 and covers figures for the full month of February 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.

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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