2018 – a year of two halves
In January 2018 there was one phrase on the lips of market commentators, myself included, and that was ‘synchronised global growth’. I’m sure you remember that time when the global economy looked like it would continue to grow at a lovely rate and we had one of those rare moments where all parts of the world were firing on all cylinders. Well that didn’t turn out too well did it!
Synchronised global growth has now been replaced with phrases like ‘late cycle’, ‘trade wars’ and ‘global slowdown’ and the narrative has completely changed from one of positivity to one of pessimism and almost fear. Frustratingly the market has a very good habit of reminding everyone that things can change just when everyone is starting to get comfortable. I wrote about some of those comfort factors in my piece in September and indeed suggested that we may be close to a turning point – and it seems my instinct was right, judging by performance in the final quarter.
When looking back at 2018 we can really think of it in two distinct halves, with the first half of the year dominated by the continuation of the previous year’s winners with growth and momentum performing strongly. Technology was a particularly dominant theme and we saw Apple at the start of August become the world’s first $1trillion company. It’s funny when you look back at turning points in history, as often there is a trigger that you can look back on and say “that was the moment when something changed” – and this may well have been one of those times.
When managing the Active MPS, we meet fund managers constantly and last year, whenever we met managers who invest with a value style, they just could not believe how stretched the market had become. It was almost as if investors thought that old fashioned businesses would never make a profit again while anything that had a whiff of technology was the best thing since sliced bread. Those of you old enough to remember the technology bubble in 1999/2000 may feel a sense of deja vu at that.
A look at the chart shows you the performance of growth and value relative to the global market during last year. This clearly shows just how dominant the growth style was and how out of favour value was until around the middle of the year.
Source: 29/12/2017 – 31/12/2018 Data from FE 2019
The second half of the year, and particularly the final quarter, represented a major change in sentiment when investors started to realise that the global economy perhaps wasn’t quite in the rude health that everyone thought, and that China, Europe and the UK were perhaps exhibiting signs of a slowdown. And here was when value stocks started to wake up and while performance in the final quarter wasn’t quite enough to have it outperforming for the year, there was a major recovery.
As the New Year started, we again got a sign that not everything was rosy in the world of growth investing when Apple issued its profits warning. This reaffirms the view of many that we are coming to the end of this stellar bull market which has certainly persisted for a lot longer than most in history. While there is a lot of conjecture about whether this global slowdown will translate into a recession, there are certainly signs in the UK, Japan and Germany that growth is hovering around, or slightly below, zero.
Looking at the growth vs value picture again but over a much longer period, we can see that since the financial crisis, growth as a style has been the significant driver of global markets.
Source: 31/12/2007 – 31/12/2018 Data from FE 2019
What we should remember for just about all of this period is that global markets have been supported by Quantitative Easing. The key question looking forwards is, in a post Quantitative Easing world, can growth continue to be the dominant theme, particularly if global growth continues to slow down?
From a portfolio construction perspective our Active MPS is positioned to balance this by having exposure to both growth and value (or defensive) investments within the portfolio. The likes of Troy Trojan Income, Dodge & Cox US Stock and Man GLG Japan Core Alpha are all positioned to perform well should the shift away from growth continue through 2019. All three of these positions were lagging their markets in the first half of the year and this shows the importance of understanding the styles that managers follow and being patient enough to let this style work over time. Many investors fall into the trap of thinking they are diversified simply because they have different holdings in their portfolios but then learn the hard way that they were in fact tilted towards all of the same factors.
While I’m certainly not calling a recession for 2019, I do think that the end of Quantitative Easing is a turning point in the economic cycle. The previous position of having risk assets underpinned by central banks seems to have come to an end and it may well be that the style of investing that has worked so well for much of this elongated bull market may not be the dominant style going forwards. The long-term gap between growth and value remains incredibly wide and as a result, we are prudently managing our portfolios and ensuring we have well diversified portfolios that are not overly reliant on one particular type of investment as we begin 2019.