Balanced ETF portfolios Q3 2019 commentary

Market overview

The summer of 2019 — and much of the third quarter for that matter — was a difficult time for markets, which were broadly characterized by raised levels of volatility and investor uncertainty. Global economic data continued to disappoint and indicate a global slowdown. Geopolitical tensions remained at elevated levels. The ongoing trade negotiations between the US and China and uncertainty about Brexit were joined by escalations in the Middle East.

As a result of these developments, central banks introduced further monetary easing. The Federal Reserve in the US introduced two rate cuts, while the European Central Bank also responded with rate cuts and restarted quantitative easing. All this led to a rollercoaster of asset class returns. Equities sold off at the beginning of the quarter while Treasuries posted record returns, but this was followed by more bullish sentiment in September.

On the equity side, Japanese equities delivered the highest returns in the third quarter. This was despite a consumption tax hike and declining consumer confidence. European (ex UK) equities came in second, most likely driven by policy easing to counter weakening growth. The US S&P 500 experienced strongly positive returns, which BlackRock believes was also linked to additional rate cuts as well as a relatively stronger economic outlook (at least compared to Europe). EM and Asian equities concluded the quarter with negative returns. China’s economic picture seems to be slowly deteriorating, with the trade dispute certainly not helping.

On the fixed income side, we saw overall positive performance across the risk spectrum. Clearly leading was European government debt, closely followed by US Treasuries. Additional easing by central banks and rising doubts about the global economy has certainly helped performance. Global investment grade and high yield debt also posted positive returns.

Portfolio performance

(Performance is net of all fees) 

The risk profiles produced positive returns in the third quarter, led once again by developed equities. The positive performance of the equity allocations was predominantly driven by U.S. equities (Value and S&P 500) and Japanese equities.

After strong bond performance this year, the last month saw a setback. Over the full quarter, the fixed income allocation enjoyed positive returns across all risk profiles, led by investments into European government bonds.

Finally, within the non-traditional sleeve, the exposure to developed market property showed positive performance over the course of the quarter.

Outlook

BlackRock still believes the economic expansion is intact, supported by dovish central banks and a robust U.S. consumer. This suggests moderate risk-taking will likely be rewarded – even as recent events reinforce our call for a greater focus on portfolio resilience.

BlackRock expects more Federal Reserve rate cuts, but believes markets are pricing in too much monetary easing. The ECB materially exceeded market expectations on stimulus, launching a broad package with a combined impact that should be greater than the sum of its parts.

BlackRock does not believe monetary policy alone is a cure for the fallout from global trade tensions. Supply chain disruptions could deliver a hit to productive capacity that fosters mildly higher inflation even as growth slows. This complicates the case for further policy easing.

Overall, BlackRock favours reducing risk amid the ongoing protectionist push, with a preference for U.S. equities for their reasonable valuations and relatively high quality; and the min volatility and quality factors for their defensive properties. The portfolio continues to use government bonds as important performance stabilisers.