Fourth Quarter Review of SEI’s Strategic Portfolios

I thought you might be interested to read about one of our Investment House’s views on the Fourth Quarter of last year and their views on the Economic Outlook.  We use SEI, as an Investment House, quite often and they have a good track record.  They say:

Market overview

An enthusiastic start to 2018 for global stock markets quickly faded as anxiety over the pace of rate hikes from the US Federal Reserve triggered a sharp rise in bond yields and was a key driver for an early year equity market correction across major markets. Amidst the uncertainty of trade wars, geopolitical uncertainty, particularly across Europe, and a stronger US dollar, US equities led the rest of the world for the most part, with impressive gains in particular coming from mega-cap technology stocks. Intense bouts of risk aversion in October and December resulted in one of the worst quarters for global stock markets since 2011, pulling most risk assets into negative territory for 2018. Fears of a near term recession on the back of quantitative tightening in the US, disappointing economic data out of Europe, a weaker Chinese economy and geopolitical risks such as Brexit, Italy and the ongoing trade conflict between the US and China weighted heavily on market sentiment. The end result was a return of -10.3% for UK equity markets, as measured by the FTSE UK All Share Index, taking the 1-year return to -9.5%. Government bonds were again the beneficiaries of increased risk aversion, with global bond yields compressing over the final quarter. The UK government bond market, as measured by the BofAML UK Gilt All Stock Index, rose 1.9% over the quarter although only ended the year up 0.5%. Non-government debt underperformed, particularly in the high yield market where the energy sector reacted negatively to the sharp drop in the oil price. Falling energy prices were also a major driver behind the poor showing from commodities over both the quarter and year, with the broad Bloomberg Commodities index down 11.2% for 2018.

Portfolio positioning

The stability-focused funds delivered returns of between -0.8% and -3.6% for the fourth quarter, taking the 2018 performance to between -1.4% and -3.1%. The use of Global Managed Volatility within the equity components of these strategies provided a degree of protection against the worst of the equity market falls, but that, in combination with only marginally positive returns fixed income strategies, were insufficient to offset the sharp falls seen in equity markets. The growth-focused funds delivered returns of between -6.1% and -11.9% for the final quarter, bringing their calendar year performance to -5.6% and -9.2%. The poor performance of equity markets across the board dominated the funds’ overall outcomes for both the quarter and the year. Our funds have also strongly favoured Value, and to a lesser degree Momentum, over the course of the year and both styles were challenged in the recent risk-off investment climate. During the quarter, we undertook a number of changes, mostly in relation to the underlying investment managers utilised in the strategies.

Economic outlook

The severity of the recent declines in equities can certainly prey on investors’ emotions. Yet we expect to see continued global economic expansion in 2019, albeit at a moderating pace, and regard valuations across most markets as more attractive. The sheer ferocity of the recent correction is reminiscent of other times in the past eight years when risk assets sold down hard, only to turn around and hit new highs. As painful as the past three months and the past year has been for risk assets, the gyrations experienced have not been outside the norm. Rather, given our views that the global economy will continue to grow and that market participants are overreacting to the concerns of the day, we see another important risk-on opportunity developing in equities and other risk assets.