Whilst the fundamental case for US tech stocks remains strong, growing concern that valuations had gone too far too fast saw the Nasdaq 100 equity index fall 11% from its high on September 2nd. Notably, the outperformance of US tech stocks relative to the MSCI World has now fallen below its 50-day moving average and dropped out of the uptrend it’s enjoyed since the start of the pandemic. Having pre-emptively reduced exposure to US technology, on valuation concerns, we will be monitoring this development closely over the coming weeks as further weakness could present an attractive entry point.  

Our investment process is grounded in fundamental economic research and driven by the broad macroeconomic and geopolitical trends that drive markets over time. However, we also use technical analysis, like the chart above, to help identify key turning points in these trends and to gauge investor sentiment over time.

For example, an improving economic outlook, accompanied by rising investor sentiment, may eventually cause prior winners to underperform and the laggards to catch-up. Growth stocks have outperformed value stocks by a considerable margin over the last few years and recent gains have been parabolic. Whilst the death of value investing has been widely documented, we are mindful of the potential for a ‘great rotation’ like that witnessed following the dot.com peak in March 2000. It is far too early to make that call today, but if the tech trade does start to unwind, and the yield curve continues to steepen, prompting a rotation into financials, then value names could become very interesting.

Another key development this week has been Brexit, and the UK government’s announcement that it plans to re-write the Brexit divorce deal, breaking international law in a ‘very specific and limited way’. With fading hopes for a trade deal, and the EU threatening legal action, GBP took a hit. This renewed vigour from the UK government is partly political. Ratcheting up the aggression on Brexit will appeal to Boris Johnson’s support base during a period of perceived weakness. It’s also part bluster, to get the EU’s attention, and drive home a better deal which is clearly the intention of both sides. But the ambiguities within the Northern Ireland Protocol are real and inherently contradictory which is what the Internal Market Bill seeks to address. Then there is the issue of EU state aid rules, which would apply in Northern Ireland and require the UK government to notify the European Commission if it plans to subsidise businesses that do trade with the rest of the island of Ireland. Boris Johnson and Dominic Cummings fear this could scupper plans to reinvigorate the British economy via the creation of national ‘tech’ champions.   

The situation remains extremely fluid and whilst we do not know how the negotiations will ultimately unravel we think that if an agreement is struck, it will likely be at the last minute ahead of the October 15 deadline, raising short-term risks to the downside. Indeed, since taking office Boris Johnson has shown himself to be a fan of political brinkmanship. However, a no-deal Brexit also remains an outside risk in which case GBP/USD could fall to prior lows around 1.20.

Our medium term outlook for a weaker US dollar forms the cornerstone of our strategic market outlook. However, in mid-August, we turned tactically cautious that a near-term rebound in the US dollar could translate into GBP weakness, particularly following a summer-of-love that saw GBP/USD rally to almost 1.35. Having broken to the upside through its 5-year resistance line our strategy has been to give sterling the benefit of the doubt. However, GBP/USD failed to find support off this line and then failed to re-enter it’s prior August range, prompting us to unwind a portion of our US dollar hedge earlier last week. We continue to monitor the situation closely with a view to dynamically adjust our currency exposure as and when required.

Finally, a brief update on commodities. Since we made the case to go long in mid-June, the commodity carve-out, comprised of gold, silver, copper and coffee has performed extremely well, both on an absolute basis and relative to the MSCI World benchmark.

Following significant gains earlier in the year, which saw the price of gold reach a new all-time high above $2,000 per oz, we have since seen the yellow metal fall back slightly with price now testing old resistance as new support. If this support level holds and gold rallies from it, that is very bullish, and we could see gold rally towards a new upside target of $3,000 per oz.

As this is something we are actively monitoring, we are emboldened to see that the Swiss franc recently broke above 1.10 versus the US dollar; something it has been trying to do for the last 5-years. Previous attempts to do so have failed and are consistent with gold underperforming equites (both are considered safe-haven assets). If the Swiss franc can lift itself off the yellow resistance line, and move decisively higher, we see that as bullish for precious metals, like gold and silver. This technical perspective is consistent with our strategic outlook that the ongoing devaluation of the US dollar will boost precious metals higher over time.

This week we have a slew of central bank meetings including the Federal Reserve on Wednesday and the UK and Japan on Thursday. In the UK, markets are pricing in a 10bps rate cut by March, contributing to recent sterling weakness, but we are not expecting any action to be taken this week. We also expect the Fed and BoJ to stay on hold.