DMG Diversified Portfolio Update July 2019

 

The DMG Diversified Portfolio (DMGDP) returned +2.46% over the month of June – a pleasing result. Financial year 2018/19 illustrated just how fickle market sentiment can be. In the period January to June  2019 investors were willing to look at a ‘glass half full’. In late 2018 it was exactly the opposite, the glass was ‘half empty’. 

The reason for the change was two-fold; a change in the US Federal Reserve language from that of planning to increase interest rates to a reduction, which has now come to fruition. Secondly the fears of a much-anticipated global economic slowdown in late 2018 which did actually start to take hold in 2019. Most knew some form of slowdown was coming in 2019 – it had to, global economic growth (and in particular, US economic growth) was unsustainably strong in 2018. But ironically it was the fear of the slowdown rather than the slowdown itself that unnerved financial markets so much. Now that the slowdown is here, ironically, markets are once more in a positive mood. The reason? ‘Bad news is good news’ once again as weaker economic growth prompts most into thinking that more central bank monetary stimulus is not too far away. Indeed the US Federal Reserve reduced interest rates in August for the first time since the GFC. 

Have global equity markets have come too far, too fast? We are still positive on the equity market outlook over the medium-term but given the considerable rally so far this calendar year we worry there is the distinct possibility of some form of short-term pullback between here and year end. The August – October period, for reasons unbeknown to most is traditionally a jittery time for global markets anyway. Add to this the uncertainty looming in the form of a hard Brexit deadline (October 31) and we believe it is prudent to consider taking profits on positions that have run particularly hard. After all, it’s still fresh in everyone’s minds just how sharp the pullback experienced over Q4 2018 actually was.

Given the severity of this experience and the fact that the large swing in market sentiment toward the negative was largely unexpected, it probably wouldn’t take much to spook the herd once again. Sweeping some profits back into cash and adopting a more conservative tactical stance in the leadup to the traditionally volatile seasonal period is something that is part of our analysis and discussions.

 
Erin Neumann