Whitechurch Quarterly Review - Q3 2019

18th October 2019

Welcome to the Whitechurch quarterly investment review. This review covers the key factors that have influenced investment markets over the past quarter and the Whitechurch Investment Team’s current views and broad strategies being employed.


The UK market delivered a small positive return in the quarter. Mid-cap stocks, though not small-caps, outperformed large-cap stocks. This dichotomy occurred despite sterling’s general weakness on the foreign exchange market - sterling fell by 3% in value against the dollar and the yen (although it gained 1% against the euro). The overall decline in sterling’s value should have been more supportive to larger companies given their relatively greater exposure to overseas earnings.

UK Equities Three Month
Total Return %
IA UK All Companies 1.08%
IA UK Equity Income 1.01%
IA UK Smaller Companies -1.40%

Investor sentiment was relatively sanguine despite the ongoing political turbulence, over Brexit, which resulted in Boris Johnson leading the first minority government in 23 years. During the quarter, parliament passed legislation that will force the government to ask for an extension if it does not reach an exit agreement with the EU.

Economic data released during the period reinforced the picture of a slowing economy (as in many other countries). GDP fell by 0.2%, in Q2, although this partly reflected the unwinding of the stock-build that took place in Q1, ahead of the aborted Brexit date. The British Chamber of Commerce (BCC) cut its economic growth forecast for 2019 from 1.3% to 1.2% and lowered the figure for 2020 from 1.0% to 0.8%. This is below the 1.1% forecast for next year compiled by the Reuters’ survey of economists.
On a more positive note, the Office of National Statistics (ONS) said total earnings growth, including bonuses, rose by an annual 4.0% rate in the three months to July, its highest level since mid-2008, up from 3.8% in the three months to June. The boost to real earnings growth was amplified by the announcement that CPI inflation fell to an annual rate of 1.7% in August from 2.1% in July.

In summary, whilst investor sentiment is being buffeted by the continuing Brexit drama, the UK market continues to offer a number of investment opportunities. In particular, the relative valuation of the UK market is very attractive with a dividend yield of 4.3% which compares to the 0.4% available from ten-year gilts.



Global Equities Three Month
Total Return %
IA Japan 6.17%
IA North America 3.54%
IA Global 2.41%
IA Europe, excluding UK 0.51%
IA Asia Pacific, excluding Japan -0.13%
IA Global Emerging Markets -0.83%

US equities recorded another quarter of positive returns helped by the Federal Reserve’s decision to cut interest rates by 25bps in both July and September. The loosening of monetary policy helped offset a string of negative developments, including the drone attack on Saudi Arabia’s oil sites, ongoing trade tensions with both China and the EU, and a formal impeachment inquiry of President Trump. It is also worth noting that there was a sharp rotation from ‘growth’ to ‘value’ stocks in September with Energy and Financials the main beneficiaries. Time will tell whether this marks the beginning of a new trend or not.

Economic indicators were perhaps not as negative as the Fed’s monetary policy moves might imply. The US economy continued to grow at a moderate pace with the release of data showing an annualised expansion of 2.1% in Q2. Moreover, US core consumer prices, which exclude energy and food prices, rose by 2.4% in the year to August. This was the highest level since July 2018. Labour market statistics showed the employment numbers continued to rise, albeit at a reduced pace (Non-Farm payrolls rose by 130k in August), although the rate of growth in aggregate hours worked showed a slowdown. Surveys of consumer confidence also indicated a decline although the latter remains at a relatively high level. Meanwhile, US new home sales approached their highest level since 2007.European equities recorded a modest return during the quarter. The French market recorded a positive return, however, by contrast the German market delivered a small negative return. This reflected investor concerns that the ongoing global trade disputes and slowing world economy will weigh more heavily on the more export-oriented German corporate sector. Data released during the period showed that economic growth in the Eurozone slowed to just 0.2% in Q2 (from 0.4% in Q1). The German economy contracted by 0.1% in Q2. This picture of a worsening economic environment was reinforced by survey data from the manufacturing sector although the PMI readings for services remained more positive.

The European Central Bank (ECB) responded to the weaker economic outlook by cutting interest rates further into negative territory, restarting quantitative easing and committing to continue with asset purchases until it achieves its 2% inflation target. The move was criticised by several commentators who argued that monetary policy was not the right instrument to address the economic problems facing the region. Indeed, according to the Financial Times, the bank’s own monetary policy committee advised against resuming its bond purchases in a letter sent to Mario Draghi and other members of its governing council days before their decision.
In contrast to the previous quarter, Japanese equities performed better than the other main developed markets. These gains came despite the announcement that the long-delayed consumption tax hike, from 8% to 10%, would finally be introduced in October. This poses a potential risk to an economy that is already feeling the effects of the global slowdown in manufacturing. Surveys of Japanese consumer confidence pointed to further declines during the quarter. However, retail sales rose by 2% in September having fallen by a similar amount in August. The Bank of Japan made no changes to monetary policy but said it would review the outlook at its next meeting, perhaps hinting at further easing to come.
Emerging markets, as a whole, recorded a small negative return in the quarter. Russia was one of the exceptions to this trend, in that it delivered a small positive return in the quarter. This came despite the fact that the boost to oil prices, from the attacks on Saudi Arabia’s oil sites, proved temporary. Many emerging markets continued to be negatively impacted by changes in investor sentiment as a result of the ongoing trade war between China and the US. As things currently stand, further tariffs are due to come into place by the end of the year unless renewed talks between the two countries make sufficient progress.

Chinese equities which had been in positive territory for much of the period ended the quarter by recording a small negative return. China’s economy continued to slow, with industrial production growing at 4.4%, down from around 7% at the start of 2018. Retail sales growth also slowed, to 7.5% from close to 10% in early 2018. However, given that growth is still comfortably above that in the US, and given that the US economy is also slowing as a result of the trade dispute and there is a US election next year, it is not clear that China will concede to all US demands on trade. Ultimately, however, investors expect some sort of compromise to emerge in which both sides are able to claim a political victory.
The Indian equity market suffered from the pressures of a slowing economy. Data released during the period showed that in Q2 year-on-year GDP growth was 5% which was well below the 5.8% growth rate recorded in Q1. The economic slowdown was most pronounced in manufacturing and construction. The automobile sector was particularly hard hit with car sales declining by more than 40% in August. However, just before the quarter end, the Indian government announced a surprise $20bn tax cut, which will reduce corporation tax rate for domestic companies from 30% to 22%. The effective rate, including all additional levies, will be just over 25%. This is one of the lowest corporation tax rates in Asia. On the back of this news, the Indian stockmarket rallied strongly although it still ended the quarter with a small negative return.



Fixed Interest Three Month
Total Return %
IA UK Gilts 6.29%
IA Sterling Corporate Bond 3.07%
IA Global Bonds 2.49%
IA Sterling High Yield 1.41%

The ongoing trade war between the US and China, slowing global growth, the continuing Brexit negotiations, and an increasingly supportive stance from central banks across the globe gave investors ample reason to continue to flock to safe-haven bonds over the quarter. UK government bonds fared particularly well in this environment, up 6.3%.

There were some significant developments in monetary policy over the quarter. The Federal Reserve officially moved away from its tightening cycle and began to loosen monetary policy, cutting rates twice over the summer. The European Central Bank also cut interest rates further into negative territory, moving the deposit rate from -0.40% to -0.50%. This saw bond yields lurch lower across the globe as investors continued to reposition towards safe-haven assets. The market’s fear of rising rates in 2018 now feels like a distant memory.

Corporate bonds also benefited from falling yields, with the IA Sterling Corporate Bond sector returning 3.1% over the quarter. High yield bonds, whilst producing positive returns, lagged behind higher quality fixed income investments as investors avoided adding too much credit risk into a slowing global economic environment.
Regarding our current positioning within fixed income, we have built a very strong defensive spine to our exposure and have continued to add to fixed income throughout 2019. We have been pleased with the performance of both our US government bond and long-dated investment grade bond funds, both of which have acted as important defensive assets during a volatile summer for financial assets.



Commercial Property  
IA UK Property -0.15%

IA UK Direct Commercial property funds were flat over the quarter. The sector remains under pressure from political uncertainties, a soft economy and the ongoing weakness in the retail space. During the quarter, we continued to reduce property weights across the portfolios.

The outlook for commercial property funds remains unchanged. There is uncertainty on three fronts; the ongoing Brexit negotiations provide uncertainty for activity within the market, the continued decline in the performance of retail and shopping centres continue to weigh on investor sentiment and additional concerns over outflows from open-ended property funds raises the threat of swings in pricing. For this reason, we have become very selective in our chosen property exposures, opting for higher yielding newer vintage funds (avoiding legacy assets) in areas such as industrial and regional office space, where rental yields and rental growth prospects are greater.



This was another strong quarter for precious metals. In dollar terms, the gold price rose by 5% while the silver price gained 13%. Investor sentiment towards alternatives to the main global currencies remained strong given geopolitical uncertainties as well as actions by central banks such as the ECB to continue their policy of aggressive monetary expansion. The rise of digital currencies such as the Bitcoin is also supportive as it normalises the hunt for alternative stores of value. Elsewhere Platinum Group Metals (PGMs) were also buoyant with both platinum and palladium prices rising by 10%. These metals share some similarities with gold and silver, in terms of their use as potential store of value and in jewellery, although they also have important industrial uses especially in catalytic converters for vehicles.

As mentioned above, the attacks on the Saudi Arabian oil facilities led to an initial spike upwards in the oil price. However, as fears of a Middle Eastern conflict faded so did the oil price. The price of Brent Crude and West Texas Intermediate ended the quarter down by 8% and 7% respectively. This move reflected the fact that the oil market remained well supplied while the global economy showed further signs of economic slowdown.

Several institutions cut their forecasts for global economic growth. In particular, the Organisation for Economic Co-operation and Development (OECD) warned that the economic outlook was “increasingly fragile and uncertain” as it cut its growth predictions. The organisation now expects global growth to slow to 2.9% in 2019 and 3.0% in 2020, which would be the weakest rates since the financial crisis. One of the areas that has been hardest hit by the economic slowdown has been the steel industry, especially in China. As a result, the key commodities used in steel production were particularly hard hit, during the quarter, with the price of iron ore falling by c.18% and that of coking coal by c.26%.



With further declines in bond yields over the quarter, the relative appeal of cash has been enhanced. However, in the UK, with inflation still running at just under 2%, cash deposits continue to offer investors negative real returns and remain unattractive for longer term investors. We currently only hold Cash for shorter term tactical reasons, or within lower risk profile strategies where the risk profile dictates a need for a larger cash allocation.

Whitechurch Investment Team,
Quarterly Review, Q3 2019
(Issued October 2019)


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