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By Tom Wickers, Hottinger Investment Management 

In October, the Financial Times published an article calling attention to the drab performance of big technology stocks[1]. FAANG (Facebook, Apple, Amazon, Netflix and Google/Alphabet) returns waned in the face of wavering economic confidence over the summer as investors cycled more defensive stocks into their portfolios. Since then, Big Tech returns have rocketed. An analysis of this year’s cumulative returns of FAAMG – which substitutes Microsoft for Netflix and represents the five largest technology companies in the world – demonstrates just how strong their performance has been.

To provide some idea of the size of the FAAMG stocks, they represent the five largest companies in the world[2] aside from the newcomer Aramco. As at the end of 2019, their combined equity values constituted 23.47% of estimated US GDP[3] which is also 5.70% of estimated global GDP[4]. Turn the clock back ten years and only Microsoft featured as a top five global company[5]. On New Year’s Eve, Apple’s market capitalisation reached heights no company has achieved before, breaking the $1.3T mark. Looking forward to 2020 and the decade ahead, can we realistically expect these mammoths to continue to grow or could we see them stall or even become extinct?

While the tech industry is notably cyclical, the outperformance of big tech stocks can largely be attributed to the surprising promise they have shown at being able to adapt and innovate this year. Apple’s 2019 iPhone sales dipped in line with expectations; few users took the plunge to upgrade to the new model. However, this disappointment was outweighed by the potential of their wearable products that grew by 50% in the year to June[6]. Apple’s ability to successfully innovate away from its legacy product led analysts to factor substantial sales growth for the next few years into their valuation. Meanwhile Microsoft’s cloud services enticed investors, demonstrating year-on-year sales growth of 59% in its latest quarter[7], mirroring Apple in recent innovation progress. Finally, Facebook has so far managed to negotiate regulatory difficulties, shrugging off its dampened share price last year following the Cambridge Analytica scandal and gaining another 254 million users in the process[8].

At the turn of this year, evaluating FAAMG using a basic value metric, Market Value/Free Cash Flow (FCF)[9], highlights how expensive these stocks have become. A high figure suggests that in relation to other companies, the ratio of expected future FCFs to current FCFs is sizable and/or that these cash flows are seen as less risky.

As technology is a cyclical and risky sector, a significant proportion of the high prices of these stocks can be accredited to cash flow growth prospects. When considering that the majority of these stocks already generate significant cash flow in comparison to their sales, markets are already pricing in weighty sales growth for FAAMG stocks in the 2020s.

Based on these numbers, it is difficult to imagine FAAMG prices climbing much higher this year. Positive investment research tends to point to the opportunities in the services sector[10], such as Apple’s foray into TV production and Microsoft’s success in cloud provision. Services are seen as a more stable sector than technology, less susceptible to revenue fluctuations due to subscriptions and contracts. Lower risk in revenues would lead to further bolstered valuations. However, it is worth noting that these services are highly contested areas at the moment. Disney, Amazon, HBO and Netflix are all battling for viewer subscriptions and there is a war ongoing between Amazon’s AWS and Microsoft’s Azure cloud services. Progress in different services sectors for these giants is not a given and a win for one can often mean a loss for another. The current stock prices therefore continue to look hopeful and on the steep side.

For an outlook on the decade, it is worth noting how FAAMG companies appear to be bucking technology trends. The average technology company quickly blossoms, matures and withers as innovation surpasses them and their products become redundant. However, big tech companies are generally succeeding in branching out and diversifying their revenue streams, slowly transforming from technology companies into quasi-conglomerates. Their size allows them to stay at the forefront of demand, through massive databanks (which are proving to be barriers to entry for newcomers[11]) and big buying power for acquisitions. Damaging regulation, which has been a major concern for investors, has so far been avoided as a result of the global reach of FAAMG companies as well as their spending power; demonstrated by Facebook and its self-regulating investments following the Cambridge Analytica scandal. Further, diversification will lessen the damage of any potential future regulation. These forays into new technology and new sectors should keep big tech alive but will ultimately lead to more melees and increased competition as giants venture into similar products. Over the coming years, FAAMG growth is unlikely to reach levels anywhere near that experienced in the 2010s – any large big tech growth would most likely come from Asia where technology is starting to diverge due to nationalism. Nonetheless, these companies are here to stay and offer substantial exposures to the American and global economies that still hold the prospect of competitive returns.

[1] https://www.ft.com/content/5a6a95e6-e67e-11e9-b112-9624ec9edc59

[2] In terms of their market capitalisation – data from Bloomberg as of 10/01/2020

[3] https://www.jpmorgan.com/global/research/global-market-outlook-2020

https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US

[4] https://www.statista.com/statistics/268750/global-gross-domestic-product-gdp/

[5] http://media.ft.com/cms/419e021c-fecd-11de-91d7-00144feab49a.pdf

[6] https://www.cnbc.com/2019/10/31/apple-wearables-business-growing-at-a-50percent-and-impressing-wall-street.html

[7] https://www.barrons.com/articles/microsoft-stock-soared-in-2019-51578002778

[8] https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/

[9] Market Value/Free Cash Flow (FCF) is similar to a P/E ratio in its use but is more relevant to the factors that determine valuation and is less prone to manipulation. However, it can also be noted that current PE ratios make FAAMG stocks look expensive.

[10] J.P. Morgan, ‘Apple: Are Shares Expensive? Thoughts on What’s Priced in Already, and What Remains on the Table’, 06/01/2020

Deutsche Bank Research, ‘Microsoft: Pre-Quiet IR Catch-Up’, 16/12/2019

[11] https://www.economist.com/leaders/2017/05/06/the-worlds-most-valuable-resource-is-no-longer-oil-but-data

By Tim Sharp, Hottinger Investment Management 

Equity markets ended the year in an upbeat mood, buoyed by the UK Conservative Party gaining an unexpected majority of 80 seats and the announcement of the US ‘phase one’ trade agreements with China.

UK equities led the way during the month; the FTSE All-Share gained 3.2% on the back of the strong mandate given to PM Boris Johnson by the British voters and the boost this could give to the UK economy through the removal of much of the uncertainty. The more domestically-oriented FTSE250 index of mid-cap stocks rallied 5.2%, thereby comfortably outpacing the more internationally-exposed FTSE100 index, which was held back by a further strengthening of sterling. Many investors are relieved by this result and the expectation is for an almost immediate increase in inward investment into the UK economy from corporate, private and retail sources. Prime Minister Johnson’s desire to have the final deal date enshrined in law could affect long-term plans, as there is still a level of uncertainty as to the type of trade deal that can be agreed. Nevertheless, the log jam of short- and medium-term investment should be eased.

The detente between the US and China was reflected in their respective equity markets; the Shanghai Composite Index gained 6.2% while the S&P 500 returned 2.9%, having hit all-time high after all-time high during the month.  In other major regions, European shares gained 1.1% and Japan’s Nikkei 225 index gained 1.6%.

Given the more growth-friendly political environment, it was unsurprising that rates continued to back-up; the 10-year US Treasury yield rose 14bps to 1.92%, the 10-year gilt climbed 12bps to 0.82% and the negative yield on the benchmark German bund narrowed to -0.19% from -0.36%.

The US dollar – often viewed as a safe haven currency – reversed some of the year’s gains during December, depreciating by 1.9% to 1.1229 versus the euro and by 2.6% to 1.3263 versus the pound. Dollar weakness also contributed to gold ending the year at a two-month high of $1,517.

It was a relatively quiet month for economic releases. Flash Purchasing Manager’s Indices (PMIs) for December continued to show a loss of momentum in developed economies during the last quarter. PMIs were higher in the US, lower in the UK and flat in Japan and the Eurozone despite the manufacturing recession in Germany and Italy, which seems to be squared away by better numbers in France. Capital Economics reports that forward-looking measures also suggest export volumes will stagnate in Q1 2020, while G7 jobs growth will soon move sharply lower.

As many investment banks and market analysts start to publish their forecasts for 2020, it would seem that the majority see the inverted US yield curve of the third quarter and the resulting market trauma as the peak of potential recession fears. The combination of this swift action by the main central banks, the US-China trade agreement and the UK general election result has led most to believe that risk assets are once more underpinned, and to conclude that the global economy will most likely stave off recession. In fact, most investment banks advocate for further investment in equities – despite lower expected returns – largely based on expectations of even poorer returns from government bonds. However, we feel that forecast earnings in developed markets over the coming year are too high and open to significant revisions. Most of the scenarios being painted are still plausible within a late cycle environment, so the question then becomes: When will recession hit?

Anecdotally, an inverted yield curve tends to point towards a recession within 12-18 months, meaning that equity investors should start to become cautious around Easter 2020. Without a significant catalyst, as has been provided by China in the past, we remain sceptical about whether the current central bank stimulus will be enough to boost the global economy, so we believe a threat of significant equity drawdown remains.

In terms of asset allocation, we retain our conviction that late-cycle investing bears heightened risk of equity drawdown. We are looking at the correlation between equity markets to investigate the possibility of reducing drawdown through diversification. Our investigations suggest that China and Japan show low levels of correlation to US and European markets. Furthermore, in the light of the recent general election result, we would increase the allocation to UK assets, particularly for UK investors, in view of the expected increased optimism for the UK to start to close the valuation gap that has opened since the 2016 referendum.

By Tim Sharp, Hottinger Investment Management 

Our final investment strategy meeting of 2019 took place in the aftermath of the UK Conservative Party gaining an unexpected majority of 80 seats and announcement of the US ‘phase one’ trade agreements with China. So far this month the, S&P 500 has hit all-time high after all-time high and the UK FTSE 250 has bounced 4.16% on the back of the strong mandate given to PM Boris Johnson by the British voters and the boost this is expected to  give to the UK economy through the removal of much of the uncertainty.

The FTSE 100 may only have gained 2.76% since the election due to the strength of the pound, but many investors are relieved by this result and the expectation is for an almost immediate increase in inward investment into the UK economy from corporate, private and retail sources. We believe that Johnson’s desire to have the final deal date enshrined in law will potentially affect long-term plans as there is still a level of uncertainty as to the type of trade deal that can be agreed, but even so, the log jam of short- and medium-term investment should be eased.

Flash Purchasing Manager’s Indices (PMIs) for December continue to show a loss of momentum in developed economies during the last quarter. PMIs were higher in the US, lower in the UK and flat in Japan and the Eurozone despite the manufacturing recession in Germany and Italy, which seems to be squared away by better numbers in France. Capital Economics reports that forward-looking measures also suggest export volumes will stagnate in Q1 2020, while G7 jobs growth will soon move sharply lower.

As many investment banks and market analysts start to publish their forecasts for 2020, it would seem that the majority see the US inverted yield curve of the third quarter and the resulting market trauma as the peak of potential recession fears. Over half of the global central banks had cut rates by then; the Fed acted swiftly with 3 rate cuts of its own and the ECB resumed quantitative easing. The combination of this swift action by the main central banks, the US – China trade agreement and the UK general election result has led most to believe that risk assets are once more underpinned, and to conclude that the global economy will most likely stave off recession. Capital Economics has predicted that the global economy will bottom out in Q1 2020 and a slow recovery in growth will develop thereafter, although unevenly spread across regions[i]. UBS concedes that 2020 will see lower expected returns on equities, but the firm stills expect stocks to outperform other public assets[ii]. In fact, most investment banks advocate for further investment in equities despite lower expected returns, however we feel that forecast earnings in developed markets over the coming year are far too high and open to significant revisions. Most of the scenarios being painted are still plausible within a late cycle environment, so the question then becomes: When will recession hit?

Anecdotally, an inverted yield curve tends to point towards a recession within 12- 18 months, which still allows for a late 2020 / early 2021 period of negative growth, meaning that equity investors should start to become cautious around Easter 2020. As we have already published, the global economy has previously relied on China to add sizeable stimulus in order to prevent recessions, but a China that is currently in transition is unlikely to step in at this point in its own cycle. Without a significant catalyst, we remain sceptical about whether the current central bank stimulus will be enough to boost the global economy, so we believe a threat of significant equity drawdown remains.

Absolute Strategy Research (ASR) continues to have a 2020 US recession as its central economic view, due to monetary overtightening in 2018 that still leaves monetary policy too tight in 2019, rather than supply chain issues leading to a blip in trade – a characteristic of a mid-cycle slowdown. This aligns with our own late-cycle view. Corporate profits and margins are under pressure, balance sheets remain levered and the recent rally in equity markets leaves very few investors positioned for a recession, meaning that such a scenario will have a notable effect on risk assets should it materialise.

Our recent dollar article outlined a scenario for a stronger dollar again in 2020, which also looks like a contrarian argument with many forecasters using the Fed‘s decision to hold rates as a signal that a weaker dollar will boost emerging markets next year. ASR believes there is less room for dollar appreciation against developed currencies, but unless there are clear signs of recovery in global growth outside the US, a broad dollar decline is unlikely.

In terms of asset allocation, we retain our conviction that late-cycle investing bears heightened risk of equity drawdown. We are looking at the correlation between equity markets to investigate the possibility of reducing drawdown through diversification. Our investigations suggest that China and Japan show low levels of correlation to US and European markets, so we have been looking at potential medium- and long-term opportunities there. Furthermore, we have increased our allocation to UK assets, particularly for UK investors, in the light of the recent general election result and the expected increased optimism for the UK to start to close the valuation gap that has opened since the 2016 referendum.

 

[i] What to expect in 2020 – Capital Economics, The Chief Economist’s Note, 16 December 2019

[ii] UBS House View, Monthly Letter, Chief Investment Office GWM, 12 December 2019

By Harry Hill, Hottinger Investment Management 

1,130:

The number of people arrested in London during the protests in April 2019.

£7.5 million:

The additional cost to the police force over the same period.

2025:

The deadline for net zero greenhouse gas emissions demanded by Extinction Rebellion[i].

For many, 2019 will be considered as the year the world at large woke up to climate change. From Extinction Rebellion and Greta Thunberg to David Attenborough’s 2019 documentary ‘Seven Worlds, One Planet’, the theme has now become an all-too-dismal feature of the everyday.

The last four years have been the hottest four on record, with winter temperatures in the Arctic having climbed by 3°C since 1990, sea levels rising, coral reefs dying, and the number of natural disasters indisputably on the rise[ii]. Ten million people were displaced from their homes between January and July in 2019[iii] alone, according to a report by the International Displacement Monitoring Centre. Any efforts to curb the consequences of global warming will require change not just from governments and corporations but also from investors and consumers.

Unlike Extinction Rebellion, the concept of ESG investing (investing with environmental, social and governance issues in mind) has been around for more than a decade. In January 2004, UN Secretary General Kofi Annan asked 50 CEOs of major financial institutions to participate in a joint initiative under the auspices of the UN Global Compact. The aim of the initiative was to encourage the integration of ESG factors into capital markets. The year following, Ivo Knoepfel released a report entitled “Who Cares Wins”[iv] which outlined environmental, social and governance factors in capital markets and set a benchmark to encourage more sustainable markets and better societies. According to KPMG[v], over the course of 2015-2017, ESG integrated investments grew 25% to US$23 trillion, accounting for around a quarter of all professionally-managed investments globally. Whilst progress has been encouraging, there remain inefficiencies surrounding ethical investing, as well as broader misconceptions about the different strategies available and how best to bring about change within society to the benefit of future generations.

Investment strategies typically fall into three categories, with slight overlap between each. (1) ESG, which refers to environmental, social and governance practices. Although there is an overlay of social consciousness, the objective of ESG is to incorporate additional factors into the existing investment process. (2) Socially responsible investing (SRI) employs negative and positive screening to eliminate investments that don’t meet certain ethical guidelines. (3) Environmental impact investing, on the other hand, proactively seeks investments that have a positive impact. Each strategy should be considered as a variation on a broader theme to ensure a better future society, but each will result in different portfolios with potentially large discrepancies in their ability to combat climate change and address social issues. The CFA Institute has expressed[vi] its concern that too many funds are claiming to be ESG managers without any standards of practice attached. A set of harmonised standards will improve investors’ ability to select the funds that really make a difference.

For some investors, wanting to invest with a conscience does not necessarily mean investing entirely in ESG-labelled funds. According to the investment philosophy of hedge fund TCI, the most effective strategy to invest ethically is to take a long-term activist approach by remaining a holder of shares regardless of their carbon footprint and using engagement to bring about change from within. TCI will actively vote against company directors if they fail to meet reduction targets and demands such as disclosing carbon dioxide emissions[vii]. It is still relatively rare for company directors to be challenged in such a manner. Bill Gates is quoted as saying, “Divestment, to date, probably has reduced about zero tonnes of emissions… It’s not like you’ve capital-starved (the) people making steel and gasoline.” As stated by Sarasin & Partners[viii] the directors of the world’s biggest fossil fuel groups were reappointed with an average of 97% investor support. This may leave the higher polluters, stocks in need of scrutiny from investors, neglected, with little incentive to change. Managers of many conventional funds do not vote for change as their investors do not demand it, and managers of ESG funds may vote for change within a portfolio of companies that are already actively tackling climate change. Clients looking to implement an ESG screen to their portfolios may wish to diversify across a variety of strategies using different philosophies.

Finally, there is a need for further transparency through more frequent and accurate disclosures. Organisations such as the Global Reporting Initiative (GRI) and Governance and Accountability Institute (GAI) acknowledge the abundance of poor quality ESG information from which asset managers are making their decisions. According to the CFA Institute, governance factors can run across more than 150 variables, yet the ability to distil data down to a few relevant factors remains disjointed. As more data becomes available and with greater transparency, the ability to correlate governance factors and climate factors to returns will improve investment strategies.

Following the UN 2019 Climate Summit in New York, it is evident that there is an urgent need to address the mounting challenges faced by global warming. To reduce greenhouse gasses by 45% over the next decade and to net zero emissions by 2050 will require drastic changes in all areas of society and by all parties. The opportunities for investment whilst allocating capital to the benefit of future generations might require a more activist form of investing aided by more transparent and accurate data.

[i] BBC: What is Extinction Rebellion and what does it want?

[ii] United Nations: Climate Action

[iii] Internal Displacements: Mid-Year Figures

[iv] Forbes: The Remarkable Rise of ESG

[v] KPMG: The Rise of Responsible Investment

[vi] CFA: Enterprising Investor

[vii] FT: TCI does more on climate action than ethical green funds

[viii] Sarasin Asset Management: Environment, Social and Governance issues

By Tim Sharp, Hottinger Investment Management 

The US dollar index (DXY) is up 1.4% year-to-date when many started the year with a weak dollar stance on the back of a flip flop in policy by the Fed scaling back potential tightening measures.

UBS publish in their FX Outlook 2020[1] that the short-term dollar trend seems to have switched lower with a weakening economic outlook that they expect to lead to continued weakness in the first half of 2020 and further easing by the fed before activity recovers in the second half of the year. They further argue that this scenario will see US investors less likely to invest in overseas assets, with the threat of global slowdown thereby undermining any strength in emerging market assets that may have resulted from the weak dollar.

Knowing where we are now, we have made the case a number of times this year for a strong dollar and find it interesting that there are analysts who now believe that the dollar should have been stronger during 2019 due to its superior growth rate amongst the developed countries. The second half of the year has seen a growth scare and a corporate profits scare followed by a rebound in consumer sentiment measures that have increased dollar volatility but also underlined the safe haven flows that underpin dollar strength.

Capital Economics calculates that the trade-weighted dollar is at its highest since Trump became President in 2017 and more than 25% higher than its post global financial crisis lows in 2011. However, they argue that the dollar is only 6% above its average since the 1970s and is a lot lower than the peaks of the mid 1980s and early 2000s[2] which means that there is still room for the dollar to strengthen from here.

Absolute Strategy Research (ASR) has recorded that over the past 20 years weak global growth momentum and rising policy uncertainty have tended to be associated with a strong dollar. Furthermore, this pattern continued in 2001 – even with the US at the centre of the global recession – when the dollar fell after the recession had ended. Therefore, for there to be broad-based dollar weakness, there would need to be stronger global growth outside the US, encouraging US investors to invest in foreign assets with non-US real yields to rise relative to US real yields[3].

The Financial Times article by Jonathan Wheatley on December 5[4] highlighted the current risk of contagion returning to the emerging world, most notably in Latin America. Argentina, Bolivia, Brazil, Chile, Ecuador, Peru and Venezuela have all been affected by crises, coming to a head in the last quarter with most countries having little or no room for fiscal stimulus.

Our website article dated October 22[5] also highlights the changes in China as it moves from capital investment to a more consumer-based economy and the very low likelihood of the Chinese authorities adding enough stimulus to reignite the global economy as they have in the past.

In summary, it looks unlikely that emerging markets will be able to provide the impetus to global growth in 2020 and ASR points out that the dollar’s refusal to weaken significantly suggests many of their central banks will be unable to lower rates much further without risking capital flight.

Safe haven flows, as the US-China trade war and interest rate differentials remain, will continue to favour the dollar, despite attempts by President Trump to meet his campaign pledge to eliminate the trade deficit and make the US more competitive through a weakening of the dollar. With the support that a low exchange rate lends to trade, it is likely that other developed nations would prefer the situation to continue in the light of US protectionist policies and the macroeconomic backdrop.

We continue to believe that the global economy is in late cycle, not mid cycle, and that the US is about to join the major economies of Europe, including the UK, on the brink of a shallow recession in 2020 that is unlikely to be saved by a US-China phase 1 trade deal. ASR summarises that the dollar has been the main channel of transmission for US monetary policy, pushing the dollar higher and thereby creating a drag on global financial conditions and depressing global growth. This will continue unless the Fed eases further.

Finally, although it is still too early to speculate on the outcome of the 2020 US presidential election, the differing views of the candidates will undoubtedly influence the path of the dollar going into the second half of the year. President Trump has taken a lot of credit for the state of the US economy and the returns from US financial markets, so it will be interesting to see how he approaches a weaker period during the presidential race. His attacks on Fed Chair Powell in recent weeks and his tweets regarding the use of negative rates by Europe would suggest that he intends to lay the blame firmly at the feet of the Fed, with the potential consequence of undermining the Fed’s independence. Democratic candidates could have different impacts on the dollar, with Lombard Odier suggesting that a Warren presidency would be dollar negative while a Biden or Bloomberg presidency would probably be dollar neutral[6]. However, the US presidential election will be held on November 3 next year, so plenty of opportunities yet remain for the incumbent to exert his influence and for global markets to follow their own path.

[1] UBS Global Strategy. FX Outlook 2020: Wither the dollar?

[2] Capital Economics. Global Markets Update. 2^nd December 2019

[3] Absolute Strategy Research. Global Asset Allocation: Staying defensive on high 2020 recession risk.

[4] https://www.ft.com/content/7e4e580e-168e-11ea-9ee4-11f260415385

[5] https://hottingergroup.wpengine.com/sino-stimulus/

[6] Lombard Odier. The dollar and 2020 US presidential elections: protectionism and trade policies at the forefront by Vasileios Gkionakis, PhD. Global Head of FX Strategy.

By Kevin Miskin, Hottinger Investment Management 

The returns from global markets in November suggest that investors continue to feel more optimistic about the prospects of a truce in the US-China trade war and a positive outcome to Brexit. There is also a general feeling that the US economy is mid-cycle rather than late-cycle.

The MSCI World Equity Index gained 3.1% during the month. US markets outperformed, with the cyclically-oriented NASDAQ leading the way with a rise of 4.5%. Whilst US companies reported their third straight quarter of declining earnings, the figures were better than anticipated and investors looked ahead to expectations of a robust recovery in 2020. The latest round of corporate activity – including the takeovers of high-end jeweller Tiffany & Co and discount broker TD Ameritrade – also buoyed US stocks. This firmer sentiment underpinned other developed markets, which posted positive returns for the month. Notably, the FTSE250 index of UK mid-cap stocks, which has acted as Brexit barometer due to its domestic bias, gained 4%.

As a result of the upbeat market sentiment, risk-off assets traded lower during the month. Developed market government bonds marginally weakened in price and widened in yield across the curve. The benchmark 10-year sovereign yields in the US, UK and Germany ended the month at 1.77%, 0.57% and -0.36%, respectively. Meanwhile, gold declined by almost 4% to US$1,454.

The economic backdrop was broadly positive during the month. US GDP for Q3 was revised higher to 2.1% and showed an improvement from the previous quarter. Elsewhere, Europe grew by a modest 0.2% in Q3, with Germany only narrowly avoiding recession. The UK posted growth of 0.3% between June and September, having contracted in the previous quarter. The widely-viewed Purchasing Managers Indices (PMI) were also supportive. Capital Economics estimates that a developed market composite PMI strengthened to 50.7 vs. 50.3, which is still at a level consistent with a Q4 slowdown but has led to hopes that Q3 was the nadir. At a sector level, manufacturing showed a broad pick-up in activity while services PMI strength was limited to the US and Japan.

Whilst there were no changes in interest rates among the major economies during the month, there was some notable commentary from central bankers. In her inaugural speech as ECB President, Christine Lagarde continued Mario Draghi’s theme of a coordinated eurozone fiscal policy, with monetary policy having very few tools to implement. In the US, Federal Reserve Chair Jerome Powell indicated in a speech to Congress that the central bank is unlikely to cut rates further and that it would take a “material reassessment” to prompt a change of policy. He added that current low rates of unemployment should help boost household spending. The comments left him in the Twitter firing line as President Trump announced that the US had been disadvantaged by not following Europe into negative rate policy. And in the UK, it emerged that two members of the rate-setting committee had surprisingly voted in favour of an immediate cut.

Thus far, investors have profited from taking a ‘glass half full’ view of political events and positioning for the economic cycle to have more legs. However, investors should be aware that markets are no longer priced for disappointment. According to Unigestion, the MSCI World Index requires earnings growth of 18% over the next twelve months to justify current valuations, with S&P 500 companies and European stocks pricing in earnings growth of 24% and 21%, respectively. These are lofty expectations considering that a definitive Sino-US trade deal has yet to be agreed, the Chinese economy is slowing and the UK Withdrawal Act has yet to be ratified.

The outlook for the UK economy remains highly uncertain. With less than two weeks to go before the general election, opinion polls suggest that a Tory majority is the most likely scenario. It would be likely that a Tory government would be able to pass the withdrawal agreement by the end of January 2020, leading to the beginning of trade talks with the EU. We believe this would lead to an initial relief rally in sterling and UK equities, but the longevity of this rally would depend on the perceived progress of the trade talks.

There is also the possibility of a hung parliament, which would delay Brexit further and raise the possibility of a ‘no deal’ exit, with likely detrimental consequences for UK equities. What is certain is that both of the main parties have pledged generous spending packages including substantial increases in the national living wage. As a result, we will be looking for signs of any pick-up in inflation and we do not believe gilts are attractive at current levels given the implied risks.

In terms of asset allocation, we retain our conviction that the global economy is late cycle and, as such, that there is a heightened possibility of a drawdown in equity markets. This risk is most significant in the United States, but Europe and the UK would certainly not be immune. We have taken several defensive measures over the last 12 months, but this past month in particular we have been looking at the correlation amongst equity markets to investigate the possibility of reducing drawdown through diversification.

 

By Laure Henicz, Hottinger Art

The global art market may be weakening, but the Christmas season is only just beginning for bargain hunters. Here is a short overview of auction house trends and some clues as to collectors’ next moves.

After four years of consistent growth and some spectacular developments, – notably the Salvatore Mundi, which sold for $450 million in 2017, and the dazzling 2018 sale of the Rockefeller collection – the global art market began to slow down in 2019.

Brexit, the US-China trade war, issues in the Middle East and escalating tensions in Hong-Kong have created a great deal of economic and geopolitical uncertainty worldwide. With New York and London having been jostling for the top two auction hotspots and Hong-Kong having cemented its own position as the third hub, global auctions unsurprisingly recorded a decline of 20.3% in first half of 2019[1]. This trend has recently been confirmed domestically by a disappointing fall in 2019 auction sales at the UK’s three leading auction houses; Sotheby’s, Christie’s and Phillip’s, which were all a third smaller than last year and saw relatively few highs during the year[2].

With the art market expected to remain flat and historically procyclical, all signals paint a bleak picture of a definitively nervous and volatile environment where confidence in the primary and secondary market is deteriorating. In addition to declining auction sales and increasing numbers of unsold pieces, auction guarantee levels have also begun to fall, having more than doubled since 2016[3].

However, in such a volatile environment full of skittish sellers, the art market has revealed itself to be quite the playground for savvy bidders on the look-out for opportunities. Trophy buyers have temporarily stepped back and their influence on prices has therefore diminished.

In this regard, it is also interesting to note that the impressionist and modern art market has declined in 2019 (33.8% down from 2018)[4], notably due to a recent shift of focus by many Asian buyers from this, their traditional area of preference, to the post-war and contemporary sector[5]. The old masters art market has remained steady since 2008, whilst the post-war and contemporary art market climbed 2.7% in the first half 2019, accounting for 40.7% of total auction sales in the first half of the year (versus 27.5% of the art market for impressionist and modern art)[6].

At this particular point in time, Afro-American artists and above all artists from booming western and eastern Africa, where a significant number of female creators are now active[7], appear to be the next diamonds-in-the-rough just waiting to be found and polished. In spite of the fact that prices remain volatile, buyers’ appetite for these still-emerging segments should only get stronger as collectors and curators are expected to dive in and try to address gaps in their collections, seeking to achieve a better reflection of the world’s artistic diversity.

In summary, it would appear that the environment for collectibles has been as adversely affected by the current geopolitical and macroeconomic risks as traditional financial markets, as well as feeling the effects of the changing tastes of the Chinese consumer. Going into 2020, the opportunities in emerging markets seem to have moved back to the forefront of investor thinking amid fears of a weaker global environment in general.

Amid such a fragile and volatile art market, prudence and a passion for establishing meaningful, inspired and coherent collections remain the two golden rules to sail safely within the ocean that is the art market. It requires skill and nerve successfully to navigate more than 260 major art fairs each year[8] and to create lasting value in your fine art collection and art estate. But these uncertain times will also be times of opportunity for enlightened connoisseurs.

 

[1] Raw Facts. Auction Review. First Half 2019, an ArtTactic report, 2019, p. 3

[2] “Bargain Hunters Rule the Art Market”, by Kelly Crow, The Wall Street Journal, November 17, 2019

[3] Art & Finance Report 2019, 6^th edition, a Deloitte & ArtcTactic report, 2019, p. 57

[4] Contemporary Art Market Confidence Report – September 2019, an ArtTactic report, 2019, p. 4

[5] “Bargain Hunters Rule the Art Market”, by Kelly Crow, The Wall Street Journal, November 17, 2019

[6] Contemporary Art Market Confidence Report – September 2019, an ArtTactic report, 2019, p. 4

[7] Modern & Contemporary African Artists. Auction Market 2016-2019, an ArtTactic report, 2019, p. 4

[8] Boom. Mad Money, Mega Dealers, and the Rise of the Contemporary Art, by Michael Shnayerson, Public Affairs, 2019, p. 363

 

By Tom Wickers, Hottinger Investment Management

Throughout the Brexit process, where uncertainty has been rife in the UK economy, one juggernaut contributor to growth has continually outdone economists’ gloomy outlooks: consumer spending. Against the backdrop of a recent lull in consumption growth, which languished at 1.5% in October[1], and with low expectations on Christmas spending, now seems an appropriate time to evaluate why consumer spending has repeatedly chugged on through adversity.

If the phrase ‘strong consumer spending props up economic growth’ does not sound familiar, a glance at UK figures for Q4 2016[2], Q3 2017[3], and even March this year prior to the original Brexit deadline[4] should provide just a few domestic examples of this actuality that has been continually demonstrated globally. In December 2017, Deloitte published a review of how resilient the consumer has been throughout the Brexit process[5]. It noted that consumer confidence had remained high despite uncertainty over future relations with Europe and a generally sombre economic outlook. Since then, the situation has changed very little. At the time of the Brexit referendum in Q2 2016, consumer confidence held at -8% [Figure 1], significantly higher than in the years following the Great Financial Recession, and has largely continued at this high level. The inference here is that concerns for the overall economy have not translated into concerns of consumers over their individual job security and financial position. Low unemployment and high real wage growth are the fundamental drivers of the high confidence that workers have experienced of late. Real wages grew by an annualised 2.1% in the third quarter and the unemployment rate remains at 3.9%, which is half its 2010 figure. The reality is that those with low incomes have dramatically increased their consumption as they have a higher marginal propensity to consume than higher earners[6] – this is reflected in an increase in net spending on essential goods of 5% between the end of 2015 and the end of 2017[7].

 

Figure 1: The history of the Deloitte Consumer Confidence Index from 2012[8]. The Deloitte Consumer Confidence Index compiles factors such as confidence in household income, job security and debt levels to give an aggregated confidence indicator.

Another compelling explanation for the resilience of consumer spending is found in the historical precedent provided by a breakdown of US GDP[9]. Since 1952, consumer spending has only decreased four times outside of a recession, two of which were shortly following a recession and one of which was immediately preceding a recession. Based on these figures, even those that are particularly bearish on markets should expect consumer spending to contribute to growth. In the three quarters prior to the ten recessions over this period, consumer spending contributed an annualised average of 1.00% to real GDP growth, while investment detracted 0.14%. This further demonstrates the robustness of consumer spending and might also suggest there is a disparity between consumers’ and business’ ability to process the economic outlook.

Some economists are suggesting consumers are spending even more than they would historically, given the prevailing market conditions. From the surge in contactless payments[10] to the increasing effectiveness of targeted advertising[11] in recent years, the way in which consumers find and buy goods is changing and (it is argued) that is making them spend more than previously. The surge of internet sales provides some insight into the speed of purchasing changes. Online sales as a proportion of total retail sales have increased to 2.4x the 2010 level, with online sales providing even more preference data and convenience[12]. However, it is difficult to prove whether the rise of internet sales or contactless purchases has contributed to new spending growth or has purely acted as a substitute for growth in other retail areas. What can be evaluated is whether the UK populace is spending at unsustainable levels, which would suggest that there is some new factor encouraging higher consumption. Two key indicators of whether the population is spending too much are if debt is unusually high and if savings are atypically low. The most recent figure on household debt-to-GDP ratios remains muted at 86.6%[13], down from an all-time high of 96% in 2010, reflecting a more cautious consumer compared to pre-crisis levels. On the other hand, the household savings ratio fell to its lowest annual level in 2017 since 1971, still trending low in 2018 at 6.1%. The recent savings ratio has been a key figure behind several articles detailing that the average person is not saving enough, particularly when it comes to pensions[14]. The danger here is that consumers will have to compensate with a heavy period of saving at some point in the future to assure their family and elderly livelihoods. Failing that, the economy would suffer from a frightening level of pensioner poverty in the long run.

Figure 2: UK historic Household Saving Ratio, as given by ONS data[15].

Throughout a highly uncertain period, consumer spending has been a knight in shining armour for the UK economy. Now, as it catches its breath, it would seem foolhardy given historical figures to presume that spending will falter altogether. That said, if consumption were to carry on heedless of savings as it has done in recent years, the UK’s long-term economic health would suffer. However, it is unlikely that long-termism will cross the minds of the hordes of shoppers during the festive season.

References:

[1] https://news.sky.com/story/uk-consumer-spending-grows-1-5-in-october-11854379

[2] https://www.businessinsider.com/brexit-aftermath-uk-gdp-q4-2017-1?r=US&IR=T

[3] https://tradingeconomics.com/articles/10252017085124.htm

[4] https://uk.reuters.com/article/uk-britain-economy-retail/uk-consumers-keep-calm-and-carry-on-shopping-before-brexit-deadline-idUKKCN1RU0TU

[5] https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/consumer-business/deloitte-uk-the-deloitte-consumer-review-the-brexit-consumer.pdf

[6] https://www.bostonfed.org/publications/research-department-working-paper/2019/estimating-the-marginal-propensity-to-consume-using-the-distributions-income-consumption-wealth.aspx

[7] https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/consumer-business/deloitte-uk-Consumer-Tracker-Q2-2019-hs5v1.pdf

[8] https://www2.deloitte.com/uk/en/pages/consumer-business/articles/consumer-tracker.html

[9] https://research.stlouisfed.org/datatrends/net/page6.php

[10] https://www.ft.com/content/77144eec-fd3e-11e7-9bfc-052cbba03425

[11] https://www.researchgate.net/publication/254008753_How_effective_is_targeted_advertising

[12] https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/october2019

[13] https://tradingeconomics.com/united-kingdom/households-debt-to-gdp

[14] https://www.unbiased.co.uk/news/financial-adviser/people-pay-less-into-pensions

[15] https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/dgd8/ukea

 

By Laura Catterson, Hottinger Investment Management

In an anticipated move, the Federal Reserve delivered its third 25 basis point rate cut of 2019 at the end of October. Notably accomplishing the “mid-cycle adjustment” alluded to by Chair Jerome Powell in July when rates were first cut and prompting comparisons to Alan Greenspan’s similar 1990s playbook. The latter, termed “the great moderation”, rejuvenated the economy with continual steady growth, decreasing unemployment, stable inflation and strengthened stocks. Will Powell follow precedent with a pause or will the cuts continue?

The Federal Open Market Committee will meet again in December and as yet there is no clear indication as to how they will act. Many anticipate a “wait and see” approach, allowing the Fed to remain data dependent. Powell stated that he is “not against further rate cuts – if developments occur that change their outlook, they will respond”. Although the Fed did not outline what would prompt them to cut again, the considerable headwinds facing the US economy include slowing global growth, the US–-China trade war and deteriorating job market.

March 9^th, 2019 marked the 10-year anniversary of the longest-running bull market in history, however the cracks are beginning to show. With the manufacturing PMI hitting its lowest point since June 2009 at 47.8 (Figure 1), slowing GDP growth (1.9% in the third quarter, 2% in the second and 3.1% in the first), weak job and retail sales reports and geopolitical tensions still present, many believe a 2021 recession to be a plausible threat.

For major stock indices, rate cuts are typically goods news; and the most recent is no different. Immediate reaction saw the S&P 500 climbing 0.3% to 3,046.77, the Dow up 115.27 points and the Nasdaq ending the day up 0.3% to 8,303.98⁽ⁱ⁾. Sentiment that US equities have been riding a bullish wave is supported by 2019’s steady stream of IPOs, which also highlights investors’ insatiable appetite. The interest rate cuts of the 90s also saw stocks soar, most notably driving the S&P 500 more than 20% higher within a year⁽ⁱⁱ⁾. The Fed may be following suit in a bid to avert a downturn, however – in contrast to the adjustments made 4 years into a period of economic expansion, these cuts occur at 10 years plus. Another notable distinction is the pause in cuts that came after the “mid-cycle adjustments” of the 90s. Data shows that when the third cut is not the last, stocks tumble. (Figure 2)

Of similar concern, in conjunction with this collective 75 basis point cut, is the Fed’s commitment to expanding its balance sheet by way of quantitative easing. These moves indicate that, in conditions now categorised by the International Monetary Fund as a “synchronised” global slowdown, any effort by the Fed to “normalise” monetary policy is, at least for now, over⁽ⁱⁱⁱ⁾.

Looking to 2020, tariffs are among the variables that could see the outlook turn to the downside and increase the risk of further cuts. If President Trump carries out all threatened hikes, rates on US imports of Chinese goods will be approximately 24%, an increase of 21% in 2 years. Similarly, the rate on Chinese imports of US goods will be nearly 26%, in comparison to an average tariff rate of 6.7% for all other countries^(iv). If current trends continue, experts predict a total loss of 900,000 jobs by the end of 2020^(v).

During a year of economic turbulence, one pillar of support is strong corporate earnings. Q3 profits registered a better-than-expected small decline, which has helped shares reach record highs in recent days. Nevertheless, this failed to satisfy Wall Street analysts who predict a bleaker Q4 – earnings growth forecasts have been slashed to just 0.8%, down from 4.1% at the start of October. Similarly weak, Refinitiv predicts S&P 500 earnings growth for 2019 as a whole at 1.3%, the slowest rate of growth since 2015, when it rose just 0.2%^(vi). This is a strong indication that the trade war is beginning to put strain on the US economy.

The Fed has much to consider when calibrating the underlying health of the economy. If there is deterioration, it is clear that further action has not been ruled out. With inflation at 1.7%, there is no justification for raising rates. This leaves the Fed with 2 options: pausing or pressing ahead with more cuts. There will most likely be pressure from President Trump’s administration to perform the latter going into a presidential election cycle which itself brings additional uncertainty. Whilst the current rate adjustments would reduce the odds of an economic recession in 2020, there are a number of reasons for investors to exercise caution going into 2021.

[i] https://www.cnbc.com/2019/10/30/stock-market-fed-rate-decision-and-earnings-in-focus-on-wall-street.html

[ii] https://www.cnbc.com/2019/10/30/when-the-fed-cuts-rate-three-times-and-pauses-history-shows-it-works-out-great-for-stocks.html

[iii] https://www.wsws.org/en/articles/2019/10/19/pers-o19.html

[iv] https://www.foreignaffairs.com/articles/asia/2019-10-08/unwinnable-trade-war

[v] https://intpolicydigest.org/2019/11/11/tariff-impact-and-what-to-look-for-in-2020/

[vi] https://www.ft.com/content/b5a2ac58-00ac-11ea-b7bc-f3fa4e77dd47

 

By Kevin Miskin, Hottinger Investment Management

With the UK originally due to leave the EU at the end of the month, domestic markets were always likely to be the focus of attention in October. In the event, Brexit was extended by a further three months and a General Election called for 12^th December. Boris Johnson and the incumbent Tory government will campaign to “get Brexit done”, the Liberal Democrats and Scottish National Party for the polar opposite, with the Labour Party opting for somewhere in between by offering a second referendum.

Sterling, which recently tested 1.20 versus the US dollar, positively surged towards 1.30 after the UK and Irish leaders agreed there was a “pathway to a possible Brexit deal” at their meeting on 10^th October. In fact, sterling was the best performing of the major currencies during the month, gaining 5.3% against the dollar and 2.9% against the euro. The improvement in sentiment was similarly reflected in the bond market, where the ten-year gilt rose by 14 basis points to 0.63%. The Bank of England has flagged that interest rates are likely to remain unchanged until an exit deal is agreed, at which point it would consider tightening policy. In the event of a no-deal exit, rates could go either way as the economic outlook remains highly uncertain – weak manufacturing is counterbalanced by robust employment and healthy consumer sentiment.

The economic dichotomy is similar in the US, where unemployment is at a 50-year low and wage growth solid. Yet, the Federal Reserve’s (Fed) Beige Book, which largely consists of qualitative information, pointed to a slowing economy as the China-US trade war has dampened business activity since early September. Sentiment may have subsequently improved as both parties communicated more amicable statements during October and suspended the imminent set of tariff increases. This improved optimism was reflected in the US Treasury market, where the 10-year Treasury yield rose to 1.77% from 1.66% at the end of September. Simultaneously, the three-month Treasury bill rate fell below that of the ten-year as the Fed unveiled a $60bn-a-month purchase programme to ease short-term funding pressures, thereby reversing the inversion of the yield curve. At the end of the month, the Fed cut its policy rate by 25 basis points and signalled that it would not act again this year, which suggests that it continues to believe the economy is mid-cycle rather than late-cycle.

In Europe, the ECB kept policy on hold as expected. However, its outgoing president Mario Draghi warned that the eurozone economy faces “protracted weakness” due to slowing growth and Brexit uncertainty. He expects rates to remain low and has encouraged governments to turn on the fiscal spigots to drive economic expansion. Despite this downbeat assessment and a disappointing eurozone composite PMI reading, German bund yields extended September’s upward shift across the curve, with the 30-year bund yield moving into positive territory (just).

Economic growth in China continued to slow as a result of the trade war with the US and weaker domestic demand. GDP expanded by 6% year-on-year in Q3, which is slower than expected but still within the government’s target range of 6% to 6.5%.

Global equity markets outperformed bonds on an aggregate basis and ended October at an all-time high, in local currency terms, as measured by MSCI. The outperformance of the Nasdaq, Dax, Nikkei, Hong Kong and Chinese equities suggests that a move back into cyclicals has been underway after the brief rotation in August / September.

The month of October started with a stock market sell-off after the US was given approval by the World Trade Organisation to levy tariffs on $7.5bn worth of goods it imports from the European Union, thereby further escalating trade war concerns. Yet, as the month progressed, US-Sino trade tensions abated and a broadly positive US Q3 earnings season provided a base from which to build. At the time of writing, 40% of S&P 500 stocks have reported, with 80% of companies surpassing estimates, albeit by small margins. The Information Technologies and Communications sectors have been amongst the leading sectors in terms of positive earnings and performance. The technology-heavy Nasdaq gained 3.8% on the month, thereby outperforming the broader S&P 500 index (+2.0%). In Continental Europe, the German Dax led the way (+3.5%), powered by double-digit gains in the auto sector.

The FTSE 100 was a laggard, ending the month down 2.1%, as sterling strength negatively impacted the translated earnings of its largest multi-national companies found in the Food & Beverage and Personal & Household Goods sectors. Meanwhile, Information Technology was the best performing sector, boosted by the private equity bid for Sophos. The more domestically biased FTSE Mid-Cap index gained 0.8%, assisted by greater clarity surrounding Brexit. The forthcoming General Election will be the focus of attention for the next six weeks and will likely create greater uncertainty in the short-term. Yet, at the end of the period we should have greater clarity over the future of the UK economy, which should allow British firms and global investors alike to make longer-term plans.

In conclusion, we retain our conviction that the global economy is slowing with little sign of an inflection point in the cycle. This has led to more aggressive policy responses from central banks globally. However, the ECB and BOJ have fewer tools than others at their disposal and the Fed seems to be convinced that the US economy is mid-cycle. Unlike in previous downturns, China is reluctant to reflate, thereby removing a key support for the global economy and increasing the likelihood of a recession in 2020.

In terms of asset allocation, we retain our conviction that late-cycle investing bears a heightened risk of equity drawdown and we have maintained our defensive positioning.

By Tim Sharp, Hottinger Investment Management

Events in global markets in the month running up to our latest monthly investment strategy meeting suggested that investors were feeling more optimistic about the prospects of phase 1 of the US – China trade deal being agreed in November. The outperformance of the Nasdaq, Dax, Nikkei, Hong Kong and Chinese equities suggest that a move back into cyclicals after the brief rotation in August / September has been underway.

Global Purchasing Managers Indices (PMIs) readings have been pointing to slowing manufacturing and service sector growth, with the global composite reading around 51.2. This is consistent with very slow growth and its lowest reading since 2016. However, employment data remains strong, giving hope to investors that the consumer may well save the world from recession. Earlier in the year it looked as if the US consumer would again ride to the world’s rescue, however, real consumption growth has slowed from 4.6% annualised in Q2 2019 to nearer 2.5% in Q3 2019, with many expecting this to continue into next year.

Mario Draghi’s final ECB meeting kept policy on hold as expected, but he is likely to voice his support for fiscal easing. October’s Eurozone composite PMI rose marginally to 50.2 vs. 50.1 in September. This was below consensus and disappointing after the significant fall in September, suggesting that there is very little economic growth in Europe at present. Over half of the world’s central banks have cut rates this year and it is likely that we will see another cut from the Fed FOMC in either the November or December meeting.

By the end of Q2 2019, the US economy was already decelerating. Expanding by 2.0% on an annualised basis is a level much closer to the country’s trend rate and heralded the end of the very high rates of growth of 2018, fuelled by tax cuts and government spending.

The effect of slashing corporation tax last year and the change in the treatment of capital expenditure (CapEx) has now waned as the deadweight of new tariffs and growing uncertainty over the international trading environment have combined with the waning effect of the tax cuts. In Q2 2019, investment spending actually fell by an annualised 1.0%, the sharpest fall since Q4 2015. This coincided with poor S&P 500 profits, which came in below forecast and well below the levels required to justify current valuations. In September, the ISM PMI signalled that the US manufacturing sector may be shrinking, as a reading below 50 was recorded for the second successive month.

The outlook for the UK economy remains highly uncertain. As our committee met at the end of last week, the UK was in the middle of a debate on the latest withdrawal agreement put forward by the Johnson government, but the outcome is unlikely to prevent GDP growth from dicing with recession, with manufacturing remaining weak. Employment remains strong and inflation remains relatively high – so much like in the US, the tiring consumer remains the main source of strength. The rally in sterling during the Brexit negotiations has caused significant underperformance in the FTSE 100 this month, but it is true of all UK firms that it is difficult to make medium to long term plans without a clearer pathway for the economy after a Brexit resolution.

During this month’s strategy meeting, the key views debated included concerns over the continuing slowing of the global economy with little sign of an inflection point in the cycle. This has led to more aggressive policy responses from central banks globally, however, the ECB and BOJ have fewer tools at their disposal and the Fed seems to be convinced that the US economy is mid-cycle. Our most recent website article highlights the view that China is reluctant to reflate, and that the global economy has relied on China stimulus on previous occasions to stave off recession. The implication is that the aggregate response is unlikely to be enough to prevent global recession in 2020.

In terms of asset allocation, we retain our conviction that late cycle investing bears a heightened risk of equity drawdown. This risk exists in the United States, much of Europe and the UK. We have taken a number of defensive measures over the last 12 months: increasing allocations to cash, precious metals and government bonds; cutting emerging market exposure; rotating sectors within equity and making use of capital protecting structured products.