Late cycle investing: offence or defence?

We seem to have been 'late cycle' since 2016, but it has been a long and slow recovery from the global financial crisis and the bull market (now the longest since World War II) has been very unloved – investors have had little faith in it since the word go. So questions about how long it can last have been raised for some time. 

Global economic data is now showing signs of weakness, and the word 'recession' is being bandied around. However, at the first sign of trouble, central banks have once again stepped in. The US Federal Reserve (Fed) has now made its first cut in interest rates for a decade, and the European Central Bank has indicated it is ready to, once again, 'do whatever it takes'.

Indeed, according to Goldman Sachs, globally, 65% of central banks are on hold, with 35% cutting rates and no banks hiking.

So what does this mean for investors? 

We have been relatively cautious in our VT Chelsea Managed portfolios for some time. Last year, when the Fed was raising rates, new money coming in was used to top up our weightings to value strategies – both UK and global – as we were aware there had been a style-drift towards growth. 

We have also been using new money to buy into the dips: when markets have come off, we have been topping up on existing holdings at better prices. 

Now that central banks are cutting rates again ,growth stocks may continue to dominate. 

Coming up Trumps

Much as it pains me to admit, President Trump may well have pulled a master stroke with rates and trade tariffs. 

He, as he has said many times, is a business president. His goals are to boost business and get re-elected. Whether the reason behind the former is self-interest or not is up for debate. But, either way, what he wants to achieve is a strong economy and a strong stock market. 

When Trump imposes trade tariffs, it causes the global growth outlook and stock markets to fall. When growth expectations fall, it increases the likelihood of rate cuts, which should then help the stock market. These lower rates also mean businesses can borrow more, at cheaper levels, and grow (albeit fuelled by debt). 

Trump can then, at the time of his own choosing, take off the tariffs, likely causing the stock market to rally. He would then have everything he wants: strong stock markets and an increased likelihood of re-election. It will, in time, probably cause serious long-term issues for the US - but that is a problem for a future president. 

So if Trump pulls a rabbit out of his hat we could see a 'last' stock-market hurrah. 

However, as Romain Boscher, Global CIO, Equities, Fidelity International, cautions: “It's tempting to sit back and enjoy the ride, but that shouldn't be done naively. The markets are bathing in blissful complacency, which usually foreshadows a rude awakening.”

Because the danger is that a market 'melt-up' could be followed very quickly by a market 'melt-down'. In an ideal world you would participate in the former and avoid the latter – but that is easier said than done. 

So diversification is key, and perhaps monthly investing. That way, no matter what happens, you are either participating in the market melt-up, or buying more units for your money in a melt-down.

Funds for a market melt-up

If you are of the mind that this bull market can continue for longer, funds on the Chelsea Core Selection that have exposure to the US and other equity markets include: 

AXA Framlington American Growth – run by Stephen Kelly, this fund has a strong growth bias and looks to invest in large and medium-sized companies that can achieve their growth organically. 

LF Miton US Opportunities on the other hand typically invests a much larger proportion in medium-sized companies and smaller large companies than its peers. 

For a slightly more diversified approach, Rathbone Global Opportunities has 65.8%* of its portfolio invested in US companies. 23.5%* is invested in Europe, with the remainder split between Asia and the UK.

Fidelity Global Special Situations has slightly less US-focused make-up right now, with 54%* invested in the country. 15%* of the portfolio is currently invested in Europe, with the remainder split between the UK, Japan and Asia. 

Funds for a market melt-down

If you are worried that markets are complacent or simply want to add some more conservative diversification to your portfolio, here are some funds on the Chelsea Core Selection that you might like to consider:

Jupiter Strategic Bond has the lowest Chelsea Risk Rating among our favoured strategic bonds. Manager Ariel Bezalel can invest in any type of fixed income and will actively move the portfolio about to suit different market conditions. It has, historically, done a good job of preserving capital.

Janus Henderson UK Absolute Return had a slightly negative year last year (down -2.7%** in 2018), but when you consider the UK stock market was down 9.5%** over the same time period, it has really done its job of providing some down-side protection in falling markets. 

Gold has been described as the 'insurance against central bankers getting it wrong'. For exposure to this asset class, Merian Gold & Silver is worth a look. The manager can invest in gold and silver bullion, as well as shares in mining companies and again, adjusts the portfolio between the two, depending on the market outlook. However, investors should be aware that this fund can be very volatile.

If you are not sure which way the market will go, there are, of course, the VT Chelsea Managed funds that do the work and make these asset allocation decisions for you.

*Source: fund fact sheets, end of June 2019

**Source: FE Analytics, total returns in sterling, calendar year 2018 for Janus Henderson UK Absolute Return fund and the FTSE All Share.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.