Retirement Update – July 2019
- Discount rates continued to fall in June, while equity markets rebounded strongly.
- Discount rates fell around 20 basis points – again!
- Equity markets rallied close to 7% for the month!
- Overall, plans would have seen a modest improvement in their funding level over June despite the drop in rates.
June 2019 Summary
June was another period of volatile market movements as rates continued to fall off the back of the Federal Reserve’s decision to leave base rates unchanged – for now. Meanwhile global equity markets had a strong month, with U.S. equity markets in particular reaching all-time highs. For most plans this would have led to an improvement to their funding level, contributing to positive year to date performance. Following a difficult May this month was certainly a welcome relief.
Discount Rates & Asset Returns
Discount rates decreased sharply in June, dropping 0.18%. Current rates are now down 0.71% since year end 2018 and are 0.63% lower than rates from this time last year. The FTSE pension discount index finished June at 3.51%. It’s been two years since rates have been this low.
Global equities reversed their May losses and rallied in June. The US market increased by 7% while developed and emerging international markets increased 6%. Interest rates continued to decline while credit spreads narrowed. As a result, bonds increased in value, especially long dated and more risky segments. High Yield bonds were the best performers increasing 4%.
What’s New at R&M?
R&M Senior Adviser featured in Pensions & Investments
Senior Adviser, Ron Barin, is interviewed by Pensions & Investments to give his thoughts on the recent Raytheon Co. and United Technologies Corp. merger and their now $90 billion-plus retirement plan.
Q: How does the recent U.S. China trade war impact your investment view?
A: The biggest story in the news has to be the trade tensions between US and China, and this is clearly affecting sentiment and equity prices. Escalations to company specific sanctions on Huawei are troubling and we don’t see China and the US agreeing a final deal any time soon, as both parties need to save face.
Trump has a bit more time before the next election campaign kicks off in 2020 to put further pressure on China to negotiate a better deal for the US. China, on the other hand, also needs to save face so won’t agree to anything too onerous too quickly. With Mexico also in the firing line as Trump tried to push his policies through with force, the question on many lips is “who will be next”?
However, this doesn’t necessarily mean bad news for investors. Focusing on China as the second largest economy in the world, total exports to the US represent 2.5% of Chinese GDP, so not as significant as you might expect. On the plus side, China has a very specific growth target to meet, which requires it to deliver 6-6.5% GDP growth a year. It will also be keen to demonstrate a strong economic backdrop so it can negotiate with the US from a position of strength. Therefore, even if these tariffs have a damping effect on China’s GDP growth, we expect they will more than compensate for the impact by stimulating their economy further. For Mexico, although the tariff is smaller, at only 5% rather than 25%, exports to the US make up a much bigger part of its economy, a whopping 29% of Mexico’s GDP. However, for a global investor, Mexico is much less significant so although it’s causing some uncertainty for Mexico, we’re not too worried about long term impact on investments from a global perspective.
From a global perspective we remain generally positive on risk given stable market fundamentals. Equity valuations look reasonable, credit conditions for companies looks positive and our outlook for economic conditions is improving, driven largely by lower interest rates globally.
In short, there are always geopolitical reasons to be nervous, and it’s all too easy to run for cover, but that means you miss a lot of return. We are staying invested, as we think fundamentals will prevail.
Have a question for R&M? Please submit it to email@example.com and look for a possible answer in next month’s update!
SECURITY INDICES: This presentation includes data related to the performance of various securities indices. The performance of securities indices is not subject to fees and expenses associated. Investments cannot be made directly in the indices. The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.
CONFIDENTIAL: For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC. Past performance cannot be relied upon to predict future results. River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.
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