The first half of 2019 has so far generated positive returns for all of LD Pensions’ portfolios. The return for LD Discretionary stood at 5.5 per cent as at mid-June, driven in particular by a strong first quarter, whilst the second quarter has been characterised by turbulence in the financial markets and mixed signals from the leading economies. Both bonds and shares have delivered positive returns. Share markets are up 16 per cent for the year, and Danish shares have performed relatively well.
Mixed signals on the international stage
It is particularly the cyclical sectors – such as industrial and financial shares – that have been negatively affected over the past month by a trade conflict, with the US President recently falling out with China, Europe and Mexico. An agreement and an end to the trade war between the US and China are still a long way off, and the markets are awaiting any progress in the negotiations between the two presidents before they are likely to meet at the G20 summit in June. The US has just reached an agreement with Mexico on increased border security, which has reduced the risk of additional tariffs on trade between the two countries – as had otherwise been threatened by President Trump in mid-May.
Key economic indicators for the US, China and Europe have also pointed to a slowdown and have generally been disappointing. Whilst there have been positive signs from the services sector in the US, figures from the manufacturing sector showed a decline in early June. In the eurozone, leading indicators for economic growth are pointing downwards, and industrial production figures from Germany are expected to fall, which will have a negative impact on earnings for production and manufacturing companies in Europe. On a positive note, however, France is experiencing modest growth in domestic demand, falling unemployment and rising real wages.
In China, the signals are mixed. Recently, there have been modest rises in the prices of Chinese shares. However, there is cause for concern, as domestic demand remains weak. For example, retail and car sales are falling, and it is difficult to see a turnaround in lending or the trade balance. In addition, there has been a series of large-scale demonstrations in Hong Kong, which have attracted considerable attention.
Falling interest rates
Global interest rates have been falling over the past two months, and the yield on 10-year German government bonds is at a historic low. Factors contributing to the fall in market interest rates include uncertainty about economic developments, weak inflation and caution on the part of central banks. Whilst the European Central Bank has long maintained a low interest rate, the US Federal Reserve raised interest rates in 2017 and 2018. At the start of 2019, it was difficult to predict that the US Federal Reserve would cut interest rates, but the likelihood of this has increased significantly over the last two months. The market therefore expects interest rates to be cut in July or September this year.
A cautious approach
There is currently an increased risk of a global recession due to turmoil surrounding trade disputes and money markets. The financial markets are reacting to the current economic situation, to expectations regarding corporate earnings and to future economic developments.
Since 2018, LD Pensions has adopted a more cautious approach to its investment portfolios. The benchmark for LD Pensions’ strategic portfolio has therefore for some time reflected the fact that the global economy is in a phase of slowdown.
