The return on LD Discretionary, the largest investment fund within The Cost-of-Living Allowance Fund, stood at 7.7 per cent on 27 November 2019. year-to-date, and over the last 36 months the return stands at 13.4 per cent.
Whilst the summer and early autumn were characterised by fears of a trade war and recession, the global equity market has continued to rise in the fourth quarter, and risk appetite appears to have returned to the stock markets. This risk appetite in the market can be explained, in the short term, by 1) high liquidity, 2) confidence in a partial agreement in the trade war, and 3) signs that leading economic indicators have ‘bottomed out’.
Increased allocation to equities
The accommodative monetary policies pursued by central banks in both the US and Europe are leading to lower financing costs for businesses and a greater proportion of investment being channelled into asset classes with equity-like risk. The phrase “There Is No Alternative” is a recurring theme for many investors, who find it difficult to invest their savings in anything other than shares when government bond yields are at historic lows and cash balances above a certain threshold earn negative interest rates at many banks.
There has recently been renewed confidence that the US and China will soon reach a partial trade agreement. Both Trump and Chinese President Xi Jinping have expressed a desire to reach an agreement; though not at any cost. The stock market is reacting positively to signs of a partial agreement, as this points to a normalisation of international trade.
Turning point for economic indicators
There are signs that key economic indicators have bottomed out and are now beginning to rise again. In Germany, the business confidence index has turned round, but remains at its lowest level since 2012. Historically, the current level has signalled a recession. Exports have started to rise again, and growth in private consumption is also positive. However, investment activity amongst businesses in Germany remains worryingly low.
Business confidence and consumer confidence are moving in opposite directions in the US. Consumer confidence remains relatively stable at a high level, whilst business confidence is at a very low level. Investment activity and industrial production in the US have been declining since 2018. Activity in the US labour market remains high, and the services sector is still performing well. In China, there are signs of a slight upturn in activity in parts of the economy, and leading indicators have turned round. However, it is still too early to write off the challenges facing the Chinese economy.
Corporate earnings are generally on the decline. One of the most important factors affecting a company’s share price is expectations regarding its future earnings. Investors’ expectations of future earnings remain high, but have at the same time been falling in line with the decline in global industrial production and trade. If corporate earnings forecasts continue to be revised downwards or fall short of the consensus, this is likely to have a negative impact on the stock markets.
LD Pensions has maintained a moderate and cautious risk profile for LD Discretionary. Even with a cautious investment profile, the return has been satisfactory.
