Bill Jamieson: Trade war just one reason to be fearful of downturn

For most of the past 12 months the predominant concern among UK investors is that stock markets are looking fully valued and due a downward correction. Geopolitical tensions and the long battle over Brexit with ever more dire warnings of the consequences of a 'no deal' exit have caused investors to pull out of UK equity funds and move to cash and fixed interest stocks for safety.

A Donald Trump-inspired trade war with China is  spooking the markets. Picture: Getty
A Donald Trump-inspired trade war with China is spooking the markets. Picture: Getty

Feeling nervy? You are not alone. Around the world, fund managers have been scaling back their allocation to risk assets. Their chief concern is China and the US would break into a full-blown trade war.

A global fund manager survey by Bank of America Merrill Lynch for July reveals investment professionals significantly lowered their equity exposure at the start of the month. In addition, the poll – conducted between July 6 and 12 and which covered 178 participants with total assets under management of $542 billion – found that fund managers also have a negative view on global growth and how companies will perform over the coming 12 months.

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Michael Hartnett, chief investment strategist at BofA Merrill Lynch, said: “Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war. Equity allocation has fallen notably while growth and profit expectations have slumped.”

Some 60 per cent of investors polled cited played on fear of a global trade war as the biggest tail risk affecting them today. This has preyed on investors’ minds for months after US President Donald Trump unveiled a series of tariffs on imports as part of his “America First” programme.

But there is a wider, more general unease playing on asset allocation. Despite record earnings, the shares of America’s leading investment banks – a ready reckoner of investor confidence – have lagged the overall market. The likely reason is a concern that the US, and perhaps the global economy, is getting closer to its next downturn.

It is nine years since the last recession, almost double the average for the US economic cycle. The bull market in US stocks is also nine years old, the second-longest run on record. Unemployment is near historic lows following an unprecedented stretch of job gains. Other signs of “late-cycle” activity, such as risky US subprime lending, are popping up. And the US Federal Reserve is raising rates while other central banks keep them at historic lows.

Give trusts a better show
It has taken years – far too many years – for fund platforms to feature investment trusts. Research commissioned by the Association of Investment Companies into the availability of trusts on platforms showed a number of barriers to investing in closed-end funds for financial advisers. Although IFAs are investing more in investment trusts, allocating £990 million of their clients’ money into them last year – up 46 per cent on 2016 – this is dwarfed by the £65.8 billion invested by advisers in rival open-ended funds in 2017.

The research found an “inherent market bias” against investment companies due to advisers outsourcing investment to “discretionary fund managers” that do not use investment trusts. This comes five years after the retail distribution review, which was supposed to remove a commission bias and encourage a level playing field for investments, but still 95 per cent of assets on advised platforms “are still in open-ended funds or cash”.

AIC chief executive Ian Sayers says competition between different types of investment product is vital for a healthy market and investors should be encouraged to consider trusts, which have returned 165 per cent over the past 10 years, compared with 108 per cent for the average open-ended fund. Despite the attractive returns, Sayers said platforms can be a “barrier to the use of investment companies”. This is especially true in the independent financial adviser market where platforms’ pricing structures “can make it less cost-effective to hold listed funds… The FCA should ensure its further work on this topic considers whether platforms facilitate or frustrate competition between different fund types”.

Look abroad for income growth
Time was when investing in overseas markets meant a loss of dividend income, compared with a UK trust or fund. But not so much, it now appears.

Income-minded investors have seen overseas dividends rise 110 per cent since 2009 while payouts from UK companies have failed to keep pace, according to analysis by the £288 million Henderson International Income Trust. Manager Ben Lofthouse says payouts from companies outside the UK have more than doubled in the past nine years, with Asia leading the pack with growth of 162 per cent.

North American dividends rose 148 per cent in the period, just ahead of Japan’s 144 per cent. Emerging markets income levels shot up 91 per cent but Europe racked up the lowest level of growth at 47 per cent.

In comparison with most other regions, UK firms offered lower dividend growth at 74.5 per cent – a point worth bearing in mind for investors anxious about UK company payout levels.