Manager's Market Review and Outlook
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Performance by Asset Class Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by asset class as at 28 September 2018
| 2018 |
Rates |
FX |
Commodity |
Credit |
Equity |
Total |
| September 2018 |
0.15 |
0.23 |
0.01 |
-0.13 |
-0.13 |
0.14 |
| Q1 2018 |
0.93 |
-0.20 |
0.01 |
-0.06 |
-0.07 |
0.58 |
| Q2 2018 |
8.54 |
0.46 |
-0.02 |
0.02 |
-0.02 |
8.94 |
| Q3 2018 |
1.70 |
0.89 |
-0.06 |
-0.23 |
-0.35 |
1.95 |
| YTD 2018 |
11.41 |
1.14 |
-0.06 |
-0.26 |
-0.44 |
11.72 |
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Methodology and Definition of Contribution to Performance: Attribution by asset class is produced at the instrument level, with adjustments made based on risk estimates. The above asset classes are categorised as follows: “Rates”: interest rates markets
“FX”: FX forwards and options
“Commodity”: commodity futures and options
“Credit”: corporate and asset-backed indices, bonds and CDS “Equity”: equity markets including indices and other derivatives Performance by Strategy Group Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by strategy group as at 28 September 2018
| 2018 |
Macro |
Systematic |
Rates |
FX |
Equity |
Credit |
EMG |
Commodity |
Total |
| September 2018 |
-0.07 |
-0.04 |
0.29 |
0.10 |
-0.00 |
-0.01 |
-0.13 |
-0.00 |
0.14 |
| Q1 2018 |
0.87 |
0.02 |
-0.46 |
-0.09 |
-0.00 |
-0.03 |
0.28 |
-0.00 |
0.58 |
| Q2 2018 |
4.29 |
0.05 |
2.91 |
0.34 |
-0.00 |
-0.06 |
1.33 |
-0.00 |
8.94 |
| Q3 2018 |
-1.09 |
0.02 |
2.10 |
0.58 |
-0.00 |
0.00 |
0.35 |
-0.00 |
1.95 |
| YTD 2018 |
4.06 |
0.09 |
4.59 |
0.82 |
-0.00 |
-0.08 |
1.96 |
-0.00 |
11.72 |
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Methodology and Definition of Contribution to Performance: Strategy Group attribution is approximate and has been derived by allocating each trader book in the Fund to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected. The above strategies are categorised as follows: “Macro”: multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates) “Systematic”: rules-based futures trading “Rates”: developed interest rates markets “FX”: global FX forwards and options “Equity”: global equity markets including indices and other derivatives “Credit”: corporate and asset-backed indices, bonds and CDS “EMG”: global emerging markets “Commodity”: liquid commodity futures and options The information in this section has been provided to BHM by BHCM US The historically strong labour market displayed continued momentum in September. The unemployment rate dropped to a nearly 50-year low of 3.7% and headline job gains were strong on average over the last three months. After having languished for most of the business cycle, wage gains are picking up, with average hourly earnings rising at an annual rate of 3% so far this year. Growth in Q3 was solid, tracking above 3% at an annual rate. Consumption spending is solid and business investment is well-maintained. Housing is a relatively weak spot and we believe that this will probably move sideways at best, as mortgage rates have risen by 50bps over the last few months. Trade and inventory investment are shifting around the headline GDP number, but we believe that smoothing through the volatility should add to growth in the coming quarters. Inflation disappointed in September. Core consumer prices rose by 0.1% for the second month in a row. We believe that some of this disappointment owed to a technical distortion in seasonally adjusted used car prices. Nevertheless, the Federal Reserve’s (“Fed”) preferred measure of inflation, the core personal consumption expenditures index, remained at 2% over the last year. Monetary policy appears to be on autopilot with the economy operating above its long-run sustainable pace and inflation near the Fed’s target. Although the neutral interest rate is uncertain, most policy makers point to a narrow range between 2.75% to 3.0%, which is still a few rate hikes away, even after September’s increase. It is our belief that President Trump’s unprecedented attacks on the Fed will probably make the near-term path of rate hikes more certain. Elsewhere in Washington, the US, Mexico and Canada agreed to refresh the North American Free Trade Agreement (“NAFTA”) with a new name, the United States-Mexico-Canada Agreement (“USMCA”), and some tweaks around the edges. UK Economic activity in the UK has continued to grow at a moderate pace and we believe that this was likely supported by temporary factors in the most recent quarter. However, the uncertainty around Brexit, and the moderation of activity in Europe may pose some challenges. According to the Office for National Statistics, the economy grew by 0.7% 3m/3m in August, still supported by robust growth within the services sector, which contributed 0.45ppts. A rebound in construction activity contributed around 0.15ppts, after having been a 0.2ppt drag previously. Industrial output has also improved of late, adding another 0.1ppts to growth over the past three months. Currently, GDP is expected to grow at 0.6% q/q in Q3, up from the 0.4% seen in Q2. However, in our view growth in Q3 was likely supported by temporary factors including inventory building ahead of Brexit, as well as improved consumer sentiment due to the World Cup. Looking ahead, business sentiment within the manufacturing sector rose in September, but only after moderating markedly over the year, reflecting, in our view, both a slow-down in activity in Europe, as well as increased uncertainty around the prospects of a no-deal Brexit. Business sentiment for the services industry (which accounts for approximately 80% of the economy) continues to move sideways. Should business sentiment continue to hold, it is our belief that GDP should continue to grow at an average pace of around 0.4% q/q going forward, which should be enough to absorb the little remaining slack in the economy. Meanwhile, the unemployment rate continues to make new multi-decade lows, recording 4.0% in July (unchanged from the previous month), and jointly the lowest rate since 1975. We believe that robust employment should support consumption; for example, although retail sales fell 0.75% in September, over the year they are growing at a pace of 3.2% y/y, up from the lows of 1.0% last year. However, we believe that the softness in the housing market may still act as a drag; house price growth remains positive at the national level, but activity indicators remain modest. Moreover, we believe that tighter conditions around consumer lending may also act as a headwind to consumption. Overall, the tightness in the labour market should continue to put upward pressure on wage growth. Excluding bonuses, wage growth is averaging a pace of 3.1% 3m/12m in August, making a new post-crisis high. Wage pressure should, in our view, in turn cause inflation to pick up. Most recently, headline inflation fell by 0.2ppts to 2.4% y/y in September whilst core inflation fell by 0.2ppts to 1.9% y/y, partially unwinding the 0.3ppts jump in the previous month. The combination of moderate activity, a tight labour market, and building wage pressure has, in our view, caused the Bank of England to project inflation to remain above 2% for most of the projection horizon. It was in this light that the Monetary Policy Committee (“MPC”) voted unanimously to raise the official bank rate by 0.25ppts to 0.75% in August. Following this, the MPC voted to keep the policy rate unchanged at the September meeting. The minutes had highlighted the further improvements made in the labour market and the MPC revised up its Q3 GDP forecast by 0.1ppts to 0.5% q/q, however it also highlighted the increased concern among businesses around the prospects of a ‘no-deal’ Brexit, as well as the moderation in external growth. The key messaging from the MPC’s statement was left broadly unchanged: “were the economy to continue to develop broadly in line with [the Bank’s] Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.” The state of the Brexit negotiations remains a key risk to the economic outlook. Relationships between the EU and the UK seem to have improved since the Salzburg meeting. In a recent interview the EU Commission President Jean Claude Juncker noted that “the potential for rapprochement between both sides has increased in recent days”, and was optimistic that a deal would be reached by November. The main difficulty around the withdrawal bill, which if agreed would ensure a transition period, is still centered on the Irish border; both parties wish to avoid a hard border in Ireland. In order to do so, the EU has proposed a backstop to keep Northern Ireland within the Customs Union and large parts of the market, effectively putting a border between Northern Ireland and Great Britain. However, such a proposal would divide the UK from the UK’s perspective. It is also unclear whether such a proposal would get a parliamentary majority, given the Democratic Unionist Party’s opposition to an ‘Irish Sea Border’. Regardless, at this stage, there does not appear to be a parliamentary majority for any single brand of Brexit. EMU The EMU Composite Purchasing Managers' Index (“PMI”) fell in September, which is a further blow to the recovery envisaged by both the consensus and European Central Bank (“ECB”). Not only was the Composite PMI on average lower in Q3 than in Q2, but it also ended the quarter on a softer note, thus raising the risk of further disappointment in Q4. Although industrial production (“IP”) increased by 1% m/m in August, so far in Q3 the level of IP remains 0.2% below the Q2 average. Regarding consumer prices, headline Harmonised Index of Consumer Prices (“HICP”) inflation edged up to 2.07% y/y in September, from 2.03% in August. Core inflation fell from 0.94% in August to 0.91% in September, the lowest level since April. In our view, core inflation remains at a level that is quite troubling from an ECB perspective, and is already threatening the ECB’s staff forecast of 1.1% for 2018. There are still no signs of the “relatively vigorous” pickup in underlying inflation that President Mario Draghi highlighted before the European Parliament’s Economic and Monetary Affairs Committee, the predicted effects of which are contained within the ECB forecast. In fact, we believe that core inflation continues to show that no meaningful convergence is in place towards the ECB’s definition of price stability. After having halved the pace of monthly net purchases of bonds to €15bn from October to December, current activity and core inflation trends in the EMU economy make it difficult, in our view, to justify the ECB’s decision to, subject to conditions, end net quantitative easing (“QE”) purchases in December on economic grounds. However, the bar to change the decision appears quite high. As such, next year the fine tuning of monetary policy for the achievement of the price target will, in our view, depend solely on the decision concerning interest rates and forward guidance. Currently the Governing Council expect the key interest rates to remain at their present levels, at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels in line with its aim. Japan The EMU Composite Purchasing Managers' Index (“PMI”) fell in September, which is a further blow to the recovery envisaged by both the consensus and European Central Bank (“ECB”). Not only was the Composite PMI on average lower in Q3 than in Q2, but it also ended the quarter on a softer note, thus raising the risk of further disappointment in Q4. Although industrial production (“IP”) increased by 1% m/m in August, so far in Q3 the level of IP remains 0.2% below the Q2 average. Regarding consumer prices, headline Harmonised Index of Consumer Prices (“HICP”) inflation edged up to 2.07% y/y in September, from 2.03% in August. In our view, core inflation fell from 0.94% in August to 0.91% in September, the lowest level since April. Core inflation remains at a level that is quite troubling from an ECB perspective, and is already threatening the ECB’s staff forecast of 1.1% for 2018. There are still no signs of the “relatively vigorous” pickup in underlying inflation that President Mario Draghi highlighted before the European Parliament’s Economic and Monetary Affairs Committee, the predicted effects of which are contained within the ECB forecast. In fact, we believe that core inflation continues to show that no meaningful convergence is in place towards the ECB’s definition of price stability. After having halved the pace of monthly net purchases of bonds to €15bn from October to December, current activity and core inflation trends in the EMU economy make it difficult, in our view, to justify the ECB’s decision to, subject to conditions, end net quantitative easing (“QE”) purchases in December on economic grounds. However, the bar to change the decision appears quite high. As such, next year the fine tuning of monetary policy for the achievement of the price target will, in our view, depend solely on the decision concerning interest rates and forward guidance. Currently the Governing Council expect the key interest rates to remain at their present levels, at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels in line with its aim. The Company Secretary Northern Trust International Fund Administration Services (Guernsey) Limited [email protected] +44 (0) 1481 745736 |