In v es tm e n t Vi e ws February 2020 Like much of the investment community, we came into for both bond and equity markets. Many commentators have this year with the belief that a synchronised easing compared the virus to the SARS outbreak in 2003, which is a Global in global monetary policy last year was sufficient to useful comparison to a degree. China’s response to the virus has offset the global economic slowdown, which began been quicker and more decisive than previously, however China strategy in 2018. While some of the fourth quarter data was a is now a much larger proportion of the global economy and is now far more integrated into the supply chains of a wide range of little disappointing, particularly in the US and Germany, industries. broader based forward looking indicators paint a Just when things brighter picture. Furthermore, two of the sectors at China now accounts for 17% of the global economy versus were looking up the centre of the slowdown, US housing and global around 5% in 2003. Furthermore China accounts for around semiconductors, have decisively turned up and are no 35% of global passenger car sales (versus 7% in 2003) and longer a drag on growth. around 29% of global smartphone sales (versus 11% in 2003). It is not the disease itself that is economically damaging, so Economists have a tendency to footnote their forecasts with a much as the Chinese authorities’ reaction to it. We can say with caveat that any exogenous shocks impacting the growth outlook a high degree of certainty that the economic impact on China would lead them to revise their forecasts. The recent coronavirus caused by imposing travel and business restrictions is going to be is an example of one such shock. We will not pretend that we severe in the first quarter. The extended holiday declared by the are in any way qualified to comment on the medical aspects of government to help contain the coronavirus has now come to an the virus, but the extent to which it will impact economic growth end, but activity will take time to return to previous levels. and company earnings are key uncertainties with implications
Investment Views is produced by Butterfield Asset Management Limited l www.butterfieldgroup.com l February 2020
Global strategy / Fixed income / Equities / Global asset allocation From a global perspective, the impact will be very much sector specific, with the commodity, travel and luxury goods sectors Global particularly exposed. We know that first quarter earnings will be lower and this has led some companies to suspend their strategy earnings guidance for this year. We have been surprised at just how resilient the stock market has been to what is a sizeable drag on activity this year, but ultimately we do not expect this to Just when things change the relatively positive structural 12 month outlook. We do, however, expect this to provide a headwind to global equities were looking up outperforming US equities this year. This has been something on our radar, but not something we have expressed as a view within (continued) portfolios. While the overall market has been strong, there have been areas of weakness in the sectors most exposed, so we will be looking to take advantage of any opportunities which might present themselves.
Investment Views is produced by Butterfield Asset Management Limited l www.butterfieldgroup.com l February 2020
Global strategy / Fixed income / Equities / Global asset allocation In recent commentary we mentioned the broad and divorced from the positivity is US Treasuries, with the 10-year support that central bankers had provided to risk falling from 1.92% to 1.51%. Growth and inflation expectations Fixed assets and the impact this has had on the reduction remain depressed and appear very out of sync with buoyant in tail risks for investors. This thesis was tested almost credit spreads and equities. This caution is probably justified income immediately as, during the first week of January, the and tactically we have become even more comfortable adding duration to portfolios. US very nearly entered yet another Middle East conflict. After the initial sabre rattling and brief (muted) rise in The recent economic uncertainty is particularly frustrating as Year-end caution energy prices, tempers cooled and risk assets resumed global growth was strengthening significantly, with global services was justified their upward path. Interestingly the government PMIs rallying and manufacturing stabilising. Speculators had also bond markets continued to attract demand leading been building long positions in copper and oil highlighting the to lower yields in a sign that all is not well. As January increased confidence that the global economy was at a turning point. This underlying momentum remains and therefore our base progressed, soft and hard US economic data continued case is that damage will be minimal and that longer US bond to improve and risk assets rallied until a classic yields will rise moderately over the course of 2020; therefore, we black swan event unfolded as the coronavirus made remain underweight duration for longer accounts. After pricing headlines across the world. out all further base rate cuts in the US - which we took as a signal After the initial sell-off in equity and commodity markets, the to add duration for shorter-dated portfolios in November - the faith that investors have in easy monetary policy led to a V-shaped market is now pricing in a 25bps cut. This would not only steepen recovery, even though there has not been any significant positive the yield curve, which between the 2 and 5-year segment is now development as of yet. One asset class that remains unconvinced inverted once again, but also satisfy equity markets. Although,
Investment Views is produced by Butterfield Asset Management Limited l www.butterfieldgroup.com l February 2020
Global strategy / Fixed income / Equities / Global asset allocation at this stage, the Federal Reserve is unlikely to move rates as The Canadian Dollar and Pound Sterling are on our short list. We employment and housing markets are very strong and any further still like mortgage-backed securities and have used the recent Fixed stimulus in addition to the already expanding balance sheet is 25% uptick in interest rate volatility to add our final tranche to almost certainly going to feed into the risk of an asset bubble. appropriate portfolios. We are also reducing positions in high beta US financial bonds due to tight spreads and intend to reestablish income We entered 2020 with a very cautious allocation to credit risk and once policy uncertainty normalises. given that markets have experienced two potential black swan events already, this seems to have been a prudent decision. While With credit markets failing to reprice significantly in January Year-end caution the ultimate path and economic damage of the virus is unknown despite investors being presented with a number of new risks, was justified at this stage one thing is probable, this uncertainty will pass and the reliance on central banks to support markets is very apparent a degree of pent up demand will boost growth in the second and makes for a much less stable equilibrium in risk assets. (continued) half of the year. However, risk assets are not out of the woods Valuations remain expensive, only justifiable if global growth yet, with the US presidential election the most obvious trigger recovers strongly in the months ahead. The prospect of this for a renewed bout of volatility. Markets are currently completely remains unknown, given the supply chain, tourism and confidence unprepared for a more radical left democratic candidate and impact of the recent turmoil in Asia. Given this backdrop we the re-pricing in credit spreads and equities if this comes to pass remain positioned appropriately as we weigh up the factors that would catch many investors by surprise, especially investors in guide our allocation to risk assets. Overall within fixed income, we passive vehicles. are largely defensive and with further volatility likely ahead this is unlikely to change over the next month; therefore we remain In terms of portfolio opportunities, for portfolio mandates that focused on reducing drawdowns and volatility. are able to, we intend to use the recent weakness in non-USD currencies to build some diversification away from USD assets.
Investment Views is produced by Butterfield Asset Management Limited l www.butterfieldgroup.com l February 2020
Global strategy / Fixed income / Equities / Global asset allocation January was certainly a newsworthy month spanning After the holiday season of December, traders were welcomed geographies across the globe. The headline MSCI back in early January with news of a US strike against an Iranian Equities World index fell -0.6% during January, with diverging military leader in Iraq, which lead to retaliatory actions against US performance of the major markets. North America military bases in the Middle East. Escalating US-Iran tensions have continued to lead equity markets higher, appreciating long been a tail risk due to Iran’s ability to disrupt trade into and US equities out of the Gulf of Oman, and this risk appears to be increasing as 0.1%, while those economies most closely linked to we head into an election cycle in the US. Later in the month, the outperform again China struggled during the month. Emerging Markets news cycle shifted from the Middle East to the Far East with the fell -4.7%, European markets fell -2.5%, and Japanese spread of coronavirus. markets fell -1.4%. Interest rate sensitive sectors exhibited strong performance as US interest rates fell Any major volatility during January coincided with the death toll sharply. Utilities and real Estate both outperformed, from the virus rising sharply as the World Health Organization declared the virus a global emergency. Overall, markets reacted while technology continued to move higher and the to the news in typical fashion, selling off initially until the full communications sector was a beneficiary of the fall in extent of the news has been digested, and then buying on the interest rates as well as the new sector makeup with a weakness. The first train of thought is that markets have coped higher tilt towards legacy technology companies. with a string of bad news quite well due to the potential response from fiscal and monetary policy, while the second train of thought is that markets, especially equity markets, have potentially moved too far ahead of themselves as investors begin to exhibit signs of complacency.
Investment Views is produced by Butterfield Asset Management Limited l www.butterfieldgroup.com l February 2020
Global strategy / Fixed income / Equities / Global asset allocation Believing that markets have become potentially overextended entails discounting the policy response of the coronavirus and the Equities concurrent shutdown of the Chinese economy. Global growth estimates have been slashed regardless of any future stimulative measures in Asia or the US. The pivotal question remains: is US equities this a temporary slowdown that will be followed by a V-Shaped outperform again recovery, or could this have longer-term effects on the global economy? (continued) We are in the camp that believes the coronavirus and China shutdown could negatively impact global companies and consumers to a larger extent than the market is currently discounting, and as such we have a cautious view on equities in the near term until the medical experts can assess the true toll of this episode. However, at this point, businesses and factories are nearing the reopening phase in China and some form of normalisation is expected, which are clearly positives for global equity markets.
Investment Views is produced by Butterfield Asset Management Limited l www.butterfieldgroup.com l February 2020
Global strategy / Fixed income / Equities / Global asset allocation Global asset allocation
The chart below details our 6-12 month tactical investment strategy
Inflation protection Emerging markets Non-traditional asset classes Investment grade corporate debt
Overweight UK Emerging market debt +
Asset allocation Fixed interest Equities – Regional Equities – Sector
US$ interest rate risk Communication services
Fixed interest Sterling £ interest rate risk Europe ex UK Energy Underweight
Government debt Utilities –
Investment Views is produced by Butterfield Asset Management Limited l www.butterfieldgroup.com l February 2020
Global strategy / Fixed income / Equities / Global asset allocation This document and the information contained herein has been prepared and issued or Butterfield Bank (Guernsey) Limited, or as otherwise permitted by the Copyright by Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited and (Bailiwick of Guernsey) Ordinance 2005. You may not, without our express written Butterfield Bank (Guernsey) Limited and is for illustrative purposes only. It neither permission, distribute or commercially exploit this work. Disclaimer constitutes investment advice nor is it an offer or an invitation to acquire or dispose This commentary and/or its content is copyright of Butterfield Asset Management, of any securities and should not be relied upon as such. Prior to making any Butterfield Bank (Cayman) Limited and Butterfield Bank (Guernsey) Limited. All rights investment decision a financial adviser should be consulted. Products and services reserved. are available in the respective home jurisdictions and only in those other jurisdictions where they may be legally offered or obtained. Butterfield Asset Management Limited is licensed to conduct investment business by the Bermuda Monetary Authority. Registered Office Address: 65 Front Street, The data source for this document is Bloomberg unless explicitly stated otherwise Hamilton HM12, Bermuda. and is believed to be accurate as at the date of publication and may be subject to change without notice. Whilst every care has been taken in producing this Telephone: +(441) 299 3817. Website: www.bam.butterfieldgroup.com. commentary, neither the author nor Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited is licensed to conduct securities investment Butterfield Bank (Cayman) Limited, nor Butterfield Bank (Guernsey) Limited shall be business by the Cayman Islands Monetary Authority. Registered Office Address: liable for any errors, misprints or misinterpretation of any of the matters set out in Butterfield Place, 12 Albert Panton Street, George Town, Grand Cayman KY1-1107, it. Past performance is not necessarily a guide to future performance. The value of Cayman Islands. investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves Telephone: +(345) 949 7055. Website: www.ky.butterfieldgroup.com. exposure to a foreign currency, changes in rates of exchange may cause the value Butterfield Bank (Guernsey) Limited is licensed and regulated by the Guernsey of the investment, and the income from it, to go up or down. In the case of some Financial Services Commission under the Banking Supervision (Bailiwick of Guernsey) investments, you should be aware that there is no recognised market for them Law, 1994, The Protection of Investors (Bailiwick of Guernsey) Law, 1987 and the and that it may therefore be difficult for you to deal in them or to obtain reliable Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. information about their value or the extent of the risks to which they are exposed. (Bailiwick of Guernsey) Law, 2000, each as amended from time to time. Registered Certain investments carry a higher degree of risk than others and are, therefore, Office Address: P.O. Box 25, Regency Court, Glategny Esplanade, St Peter Port, unsuitable for some investors. Before contemplating any transaction, you should Guernsey, GY1 3AP. Company registered in Guernsey No. 21061. consider whether you require financial advice. Telephone: +44 (0)1481 711521. Fax: +44 (0)1481 714533. Any copying, duplication or reproduction of part or all of this commentary and/or its Website: www.gg.butterfieldgroup.com. content in any form without the express written consent of the copyright owner is Telephone calls are recorded for training, regulatory and security purposes. prohibited and will constitute an infringement of copyright unless expressly agreed to by Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited, February 2020
Investment Views is produced by Butterfield Asset Management Limited l www.butterfieldgroup.com l February 2020
Global strategy / Fixed income / Equities / Global asset allocation