The Long and Short of it: Review of markets August 2019
In theory August is a quiet month for markets but it rarely feels like that. This year it has been full of extraordinary activity.
A record amount of bonds are now trading with negative yields - $17 trillion of bonds are guaranteed to lose the holder money if they are held to maturity. It is not just sovereign debt that has negative yields but $1 trillion of that pile is corporate debt. I’m sure investors in these bonds have rationalised the purchase but let’s not forget in 2017 bond investors rationalised oversubscribing for 100 year Argentine debt at a yield of just 7.9% despite the fact that the government had defaulted eight times since independence in 1816 including as recently as 2014! News from Argentina that a left wing populist politician had soundly beaten the incumbent president in a primary election this month has led that 100 year debt to trade down to just 41c on the dollar and the country has asked for more time to repay short term debt which S&P have dubbed another default (as at 30/08/2019). While hopefully not as extreme we may look back at some of the activity in the bond market and question some of the rationales for this highly unusual period for bond markets.
The equity markets (bastions of logic) continue to be swung around by tweets. The will they/won’t they love affairs between Trump and China/the Fed hit crescendo with Trump’s tweet “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” (Source Twitter 23 August 2019). While the market is jolting up and down on trade war news, it is hard to think that the volatility in the Sino-US relationship can be anything but bad for the real economy. CEOs making big capital investment calls are unlikely to be reassured by tweets suggesting a thawing of relationships, when they know full well the tone could change within hours. Meanwhile the UK government looks increasingly like it is positioning for a hard Brexit. Prime Minster Johnson has recalculated the odds of striking a deal with the EU from “a million to one” to “touch and go” in a matter of weeks. The prorogation of Parliament is widely being interrupted as a tool to prevent anti hard Brexit MPs legally stopping a no deal exit at the end of October. Sterling briefly hit a 35 year low against the dollar.
I’ve mentioned in previous blogs our reluctance to take big macro risk at the current time. Given how quickly odds are changing, we still firmly believe it would be fool hardy to bet the house on any specific outcome, instead we try to focus on stock fundamentals whilst controlling the macro risks at a portfolio level.
Real estate is undoubtedly a Brexit exposed sector, with most stocks entirely exposed to the UK. However, in other ways it is a heterogeneous that creates opportunities, particularly if you can short, as JPM UK Equity Plus can.
Segro. The largest industrial property company in the Europe. It specialises in having well located warehouses that are near key transport hubs and large cities. These urban warehouses are vital for e-commerce, particularly given the increased urbanisation, which are structurally growing in the UK and Europe. High demand for well-located sites is driving up rents and Segro has a strong development pipeline which will add additional value.
Intu. The victim of e-commerce and urbanisation is out of town shopping centres. Intu is facing a combination of falling footfall, tenant default and CVAs all leading to declining property values against a stretched balance sheet.
Callum Abbot is a portfolio manager for the JPM UK Equity Plus Fund
The fund is an actively managed portfolio. Holdings, sector weights, allocations and leverage, as applicable, are subject to change at the discretion of the investment manager without notice.