Arbuthnot Latham: Global Markets Report Q1 2019

Our thoughts on
Global Markets
April 2019

Arbuthnot Latham Private Bankers
Arbuthnot Latham & Co., Limited is wholly owned by Arbuthnot Banking Group PLC with
roots extending back to 1833. We have offices in London, Bristol, Exeter, Manchester and
Dubai. We offer a full range of private and commercial banking solutions, wealth planning and
investment management.
3
Our thoughts on
Global Markets
April 2019
Our report discusses general developments within global markets over the first quarter of 2019, with a focus on
the issues influencing portfolios. Following an economic and market summary, we expand upon a number of themes
before concluding with a review of the major asset classes.
Introduction Page 4
An introduction to the report and observations from our Co-Chief Investment Officers.
Market Moving Themes Page 6
UK Retail Review
Oliver Murray reports on recent headlines forewarning of headwinds to the UK high street and retail market. The
article looks at the effects on the property market and some of the innovative ways retailers are seeking new growth.
An Introduction to the Chinese A-Share Market
In this article, Freddie Gabbertas explains the operational intricacies of investing in domestic Chinese equities and the
potentially rich opportunities found there.
Changing Gears in the Auto Industry
As Electric Vehicles are expected to dominate the future of the auto industry, Peter Doherty looks at the global dynamics
of a changing market and the drivers of recent poor performance.
Around the World Page 22
A snapshot of the more esoteric financial and economic news that UK investors may have missed over the quarter from
around the globe.
The Asset Markets Page 24
A quarterly review of the major asset classes and outlook
This section records key data for the major asset classes within portfolios, combined with our outlook for each.
Edited by Harry Havelock-Allan, Research & Portfolio Analytics Manager
Contents

4
Introduction
Welcome to this quarter’s Global Markets Report, along with the inaugural introduction
from your Co-Chief Investment Officers, Eren Osman and Gregory Perdon.
As many of you will be aware, we have held senior positions on the Investment Committee
since joining Arbuthnot Latham in 2010 and 2012 respectively. We look forward to
maintaining a high level of communication with you and thank you in advance for your
continued support.
Global markets have enjoyed a buoyant start to the year as asset prices rebounded solidly
from lows recorded in late December. Major equity indices moved higher, led by a resilient
US market. In particular, the technology sector that took the brunt of market volatility
in the fourth quarter has recorded significant gains so far this year, topped off on the
last day of the quarter by the multi-billion-dollar Initial Public Offering (IPO) of Lyft; a ride-
sharing business that competes with Uber.
Naturally, in light of one of the strongest stock market returns in nearly a decade, which
immediately follows one of the worst, investors are asking us, “where next?” To answer
this question, we first consider the driving forces behind the market direction in recent
years. Much has been written about the effects of Quantitative Easing (QE) on asset
prices, but it is generally accepted that the extraordinary loose monetary policy of the
main Central Banks has played a significant role in the record breaking length of the
current stock market rally. Sure, economic growth and corporate profits have improved
markedly to support investor appetite, but much of this growth hinges on the liquidity of
financial markets.
Understandably, investors were then cautious on how the market would adapt to the
change in tact set by the US Federal Reserve (the Fed) as it began to tighten interest
rates and reduce its heavily inflated balance sheet. Once again, while other factors have
at times attracted much of the financial media’s attention for recent market volatility,
including US-China Trade Tariffs, Brexit and Italian political instability, it is the global
impact of Central Bank monetary policy that, in our opinion, drives the market direction
over the medium and long-term.
With this in mind, you will appreciate why, among the quarter’s various economic data
releases, political developments and corporate announcements, the highlight came from
the Fed’s December meeting minutes that were released in early January. The minutes,
later confirmed through various speeches from Fed officials, indicated that there would be
a considerable pause in interest rate hikes for at least a few months. This announcement
was a meaningful change in direction from just a month earlier, when the Fed had signalled
expectations of two further rate hikes in 2019; in contrast, there is growing speculation
that the Fed may even cut rates later this year.
The Fed’s decision to pause their steady pace of quarterly rate hikes was an
acknowledgement that tighter monetary policy had begun to have a negative impact on
the real economy (viz. the production of goods and services rather than financial markets).
The Fed’s move has been seen by the markets as a welcomed effort to avoid further
widening of the jaws between US interest rates and other major central banks. We remind
you that, in contrast to his predecessors, Jerome Powell, the Fed chair, is seen as a
‘markets’ man rather than an economist. Powell spent the majority of his career as an
Investment Banker, including almost a decade at The Carlyle Group where he played a lead
role in Mergers and Acquisitions. His background supports a more proactive leadership
of the Fed; Powell has demonstrated a willingness to listen to the markets before waiting
for confirmation in deteriorating economic data.
Introduction
Eren Osman
Co-Chief Investment Officer
Gregory Perdon

5
Introduction
In reaction to Fed policy, government bond markets
recorded a sustained compression in yields as investors
resumed the hunt for yield, driving the price of bonds
higher. The US 10-year Treasury yield has recorded a
dramatic decline from highs above 3.2% in October
2018 to lows of 2.4% at the end of this quarter. Equally,
supported by ‘dovish’ tones from the European Central
Bank, acknowledging deteriorating economic data and
subdued inflation data, 10-year German Bund yields have
dipped below 0%, levels not seen for more than two and
a half years.
Alongside central bank policy, the uncertain European
political backdrop influences flows into safe haven assets.
We recently communicated that the prospect of a no-deal
Brexit seemed remote, but that a clear path to a positive
resolution also remained far from being established. As
we write now, it seems that the long-awaited deadline
of 29th March has been extended by a couple of weeks,
yet without a resolution in sight. The risk of a no-deal
appears increasingly improbable, which has provided
some support to Sterling from recent lows against the US
dollar and euro, although sterling remains well within its
trading range of the past couple of years.
Despite having suffered three defeats in Parliament,
Theresa May is potentially teeing up a fourth ‘Meaningful
Vote’ before 12th April which, if successful, would come
into legislation in May to avoid the UK having to participate
in EU elections. The UK leaving the EU before the end of
June appears to be the most likely outcome, albeit not
with May as Prime Minister. Forecasts of the eventual
outcome appear foolhardy, with a long-delay to Article 50
remaining a strong possibility, which would be combined
with a change in government leadership, early elections or
a second referendum.
Given limited further clarity of the political landscape so
far this year, our portfolio positioning remains unchanged
in this respect. Our actively managed portfolios remain
modestly biased towards overseas equities and non-
sterling assets. We are closely following developments
and are poised to review our positioning in light of any
material change in circumstances.
Despite the perceived increased support from the Fed and
mounting hopes pinned on a trade resolution between
the US and China, both of which have spurred equity
markets through the quarter, we note that economic
data had deteriorated through much of 2018 in Europe
and Asia (in particular China), continues to look poor and
has worryingly spread to the US. Globally, deflationary
concerns have resurfaced as headline inflation figures
have declined in all regions. Higher wage growth in the US
is unlikely to have much impact, as companies are more
likely to suck up the pain through their profit margins.
Optimistically, the Fed’s outlook and Chinese intentions to
stimulate its economy, albeit in a more targeted manner
than previous efforts, may serve as a relief on the poor
economic data trend, but as yet we are awaiting such
confirmation.
The Investment Committee reduced risk in the summer
of 2018 in response to our observation of the risks to
markets becoming more evenly balanced and, despite
a modest increase in risk amidst the fourth quarter
volatility, we remain broadly neutral in our risk outlook.
In the short-term, it is likely that the 2019 trajectory at
least flattens somewhat, given that a good proportion
of the “good news” is perhaps already priced in. In our
view, a neutral positon remains appropriate as some
of the headline risks that we have acknowledged may
rematerialise, while equities are otherwise fairly priced
given the fundamental backdrop that we observe.

Executive Summary
• UK high street conditions are becoming more challenging, forcing high
street stalwarts to adapt their business models.
• Despite Amazon becoming the fifth biggest retailer in the UK, 80% of
retail transactions still occur in high street shops.
• Vegan sausage rolls boosted Greggs sales growth to 9.6% in comparison
to the 0.4% for the wider retail market.
Oliver Murray
Investment Manager

Opposite & Cover: © Jason Batterham / Shutterstock.com 7
Market Moving Themes
UK Retail Review
In the latest of a line of once-loved UK retailers, Sir Philip Green’s Arcadia group announced its intention to restructure
following challenging trading conditions on UK high streets. Arcadia Group – which boasts British institutions such as
Topshop – has warned that store closures and staff layoffs may follow what has been an increasingly challenging retail
environment.
This environment and its risks have been well documented
in the press; however, what followed was more surprising.
The UK Retail Sales figure (a barometer for consumer
confidence and economic activity) surprised for the
second month in a row, with a reading of 0.4% versus a
consensus expected -0.4%. Is this simply an anomaly in
the slow decline of UK Retail, or a sign that things aren’t
as bad as they seem?
Cautionary tales in the shape of other British high street
stalwarts such as BHS, HMV, House of Fraser and LK
Bennett following similar periods of distress have likely
served as a stark warning to Sir Philip Green. British
political woes in conjunction with changing consumer
spending habits have created a perfect storm in which
department stores, media, fast food and make-up shops
have found themselves caught in the middle. Is this the
end of the high street? How much further does it have
to go? And what does the future of the high street look
like? These questions will be paramount not only for
investment committees, but in the boardrooms of these
companies as they fight to survive headwinds unlike
anything they have seen before.
The retail sector has been the driving force of the UK’s
consumption-led economy for centuries, and in particular
has helped drag us back into growth following the Global
Financial Crisis (GFC). This has meant that Retailers
and the commercial properties that they operate out of
have, until recently, enjoyed good fortune. This has been
turning for some time now. Once the lowest yielding
(and therefore most highly valued) Commercial Property
sector, Retail has switched positions with Industrial
Properties catering to the logistical needs of online
retailers, while the Office sector remains steady.
“British political woes in
conjunction with changing
consumer spending habits
have created a perfect storm
in which department stores,
media, fast food and make-up
shops have found themselves
caught in the middle. Is this
the end of the high street?”
Figure 1: Selected Prime Rental Yields
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
Industrial Distribution High Street Retail City Offices
Jan-19
Nov-18
Sep-18
Jul-18
May-18
Mar-18
Jan-18
Nov-17
Sep-17
Jul-17
May-17
Mar-17
Jan-17
Nov-16
Sep-16
Jul-16
May-16
Mar-16
Jan-16
Source: Savills UK, January 2019

8
This is symptomatic of the media-dubbed ‘Amazon effect’, which singles out the biggest culprit of the shift from
paving stones and shop windows to sofas and laptops. Amazon is now the fifth biggest retailer in the UK, accounting
for £4 of every £100 spent in the UK1
, but that still leaves a large proportion for offline competition. The vast majority
of Retail sales are still executed on the shop floors in bricks and mortar shops, with over 80% of transactions still
occurring this way. In comparison, the proportion of online sales has been steadily increasing over the last 10 years.
Non-food sales have been the main driver of this growth,
with consumers preferring to conduct their weekly food
shop in person rather than behind a screen. Despite
this, online food sales have grown from 2% of total retail
sales to over 5% over the last 10 years showing that
attitudes are changing, albeit slowly. The key takeaway
is that there is still plenty to play for in bricks and mortar
retail despite increasing online competition.
Indeed, there has been evidence of a decline in footfall
on UK high streets since Brexit; however, this has not
been as linear as some would suggest. The start of
2019 has seen another tick up that coincided with the
relief rally in equity markets. The resultant increase in
consumer confidence, and perhaps some respite from
Brexit-related worries, have been a welcome boost to UK
Retail, evidenced by the recent positive sales numbers.
1
Source: GlobalData 2019
Figure 2: UK Online Sales Mix
0
5
10
15
20
25
Online sales as a proportion of retail sales (Food) Online sales as a proportion of retail sales (Non-Food)
Online sales as a proportion of retail sales (Total)
Jan-19
Nov-18
Sep-18
Jul-18
May-18
Mar-18
Jan-18
Nov-17
Sep-17
Jul-17
May-17
Mar-17
Jan-17
Nov-16
Sep-16
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Source: Office for National Statistics, January 2019
Figure 3: BRC – Springboard Footfall and Vacancies Monitor, Retail Footfall, Three-Month Rolling Average, High Street, Percent – UK
-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
Feb-19
Jan-19
Dec-18
Nov-18
Oct-18
Sep-18
Aug-18
Jul-18
Jun-18
May-18
Apr-18
Mar-18
Feb-18
Jan-18
Dec-17
Nov-17
Oct-17
Sep-17
Aug-17
Jul-17
Jun-17
May-17
Apr-17
Mar-17
Feb-17
Jan-17
Dec-16
Nov-16
Oct-16
Sep-16
Aug-16
Jul-16
Jun-16
May-16
Apr-16
Source: FactSet, January 2019

9
2
https://natwest.contentlive.co.uk/content/prospects-for-retail-in-2019-natwest
The latest announcement that Greggs, the now famous
vegan sausage roll baker, had surpassed £1bn in sales
has been a rare victory for the high street in increasingly
uncertain times.
While Greggs is not a Retailer in the same sense as
Topman or LK Bennett, its position on UK high streets
could have made it another victim of the ‘bricks to
clicks’ phenomenon, with less demand for mid-shopping
trip snacks. Citing a highly successful social media
campaign, as well as adapting to consumer tastes by
launching vegan sausage rolls in ‘Veganuary’, the baker
has been able to achieve sales growth of 9.6% since
the beginning of the year, compared to the paltry 0.4%
for the wider Retail market. The way that Greggs has re-
positioned themselves on a product and marketing level
will provide hope to the ailing British high street that the
show is not over yet.
With the once-invincible Topshop struggling, it is clear
that old business models are no longer working and
that something will have to change for the high street to
survive. A recent report by NatWest2
outlined a move from
simply selling stock to selling experiences as a potential
change in dynamics that will become the signature of
all physical stores that survive online competition. By
integrating services into simply selling goods, retailers
hope to provide something that cannot be consumed
through a screen. Nordstrom, a luxury retailer in the US,
has already opened ‘stockless’ stores where customers
can speak to a style advisor but order the final products
online for delivery. The success of this remains to be
seen but shows the radical changes that companies are
willing to make to ensure their place on the high street
is safe.
For Topshop et al, this is their ‘Uber moment’. The next
few years will be critical in ensuring their survival, and
the degree and speed at which they are willing to adapt
will be paramount.
“With the once-invincible
Topshop struggling, it is clear
that old business models are
no longer working and that
something will have to change
for the high street to survive. ”
Figure 4: Greggs plc vs. FTSE All-Share
3000
3100
3200
3300
3400
3500
3600
3700
3800
3900
4000
4100
4200
4300
4400
4
6
8
10
12
14
16
18
20
FTSE All-Share – Price Greggs plc – Price
Q22019
Q12019
Q42018
Q32018
Q22018
Q12018
Q42017
Q32017
Q22017
Q12017
Q42016
Q32016
Q22016
Q12016
Q42015
Q32015
Q22015
Q12015
Q42014
Q32014
Q22014
18.35
4073.44
Source: FactSet, April 2019. Past performance is not a reliable indicator of future results.

Executive Summary
• Shenzhen and Shanghai Exchanges are more liquid compared to
Japanese, European and British exchanges.
• Chinese A-Shares were included into the main MSCI Emerging
Markets Index for the first time in May 2018.
• Shanghai-Hong Kong Stock Connect allows international investors
to trade Chinese securities with fewer restrictions.
• Chinese retail sales set to overtake the US after lagging behind for
nearly 9 years.
Freddie Gabbertas
Investment Management

11
An Introduction to the Chinese A-Share Market
Most of the Chinese stock market can essentially be divided into three broad camps: companies listed on the Hong
Kong Stock Exchange (known as ‘H-Shares’); Chinese stocks listed abroad (e.g. on the New York exchange); or those
listed on domestic exchanges (known as ‘A-Shares’).
There are just over 3,500 shares, denominated in renminbi, that currently trade on the Shanghai and Shenzhen
stock exchanges. This compares to just over 2,000 on the New York Stock Exchange; however, the total market
capitalisation of value of the S&P 500 is somewhat larger ($18.97t vs $4.26t in Shanghai and $1.59t in Shenzhen3
).
Despite the large number of listed firms,
we cannot mistake this for a mature
or ‘efficient’ market (meaning that
stock prices accurately reflect their
fundamentals) in the same mould
as the UK, the US or Japan. The
first companies listed here in
the early 1990s largely operated
in isolation until at least the
mid-2000s owing to significant
obstacles to foreign investment.
Even now, foreign investors only
account for 5.4% of total free-float
ownership4
, significantly less than
in other global markets.
However, the real distinguishing feature
of this market compared to more mature
examples is the prominence of the ordinary
retail investor, who will often trade for
relatively unsophisticated reasons via lightly regulated brokerages or online platforms. In 2016, they accounted
for 35.2% of the free-float ownership5
and an astonishing 86%6
of the total transactions, illustrating the highly
speculative sentiment-driven nature of their trading.
Due to the influence of these retail investors, according to the World Federation of Exchanges, the Shenzhen and
Shanghai exchanges are more liquid than the Japanese, European and British exchanges if measured by the value of
traded shares, which is incredible for such a young market.
Historically, the A-share market has been shunned by most non-Chinese investors and existed as a largely domestic,
retail-driven market. The reasons for this includes not meeting requirements (for instance regarding transparent
financial reporting) for admission in globally recognised indexes utilised by large investors, and limits on ownership
by overseas investors.
3
Source: Bloomberg as at 27th March 2019
4
Source: Aberdeen Standard Investments, based on data from Wind, CIRC, NSSF and UBS-S
5
Source: Aberdeen Standard Investments, based on data from Wind, CIRC, NSSF and UBS-S
6
Source: Aberdeen Standard Investments, based on data from CEIS and UBS-S
Figure 5: A-Share Ownership
Others (Company Directors etc.) (15.5%)
Foreign Investors (5.4%)
Insurance Companies (5.3%)
National Social Security Fund (5.4%)
Hedge Funds (11.8%)
Mutual Funds (9.4%)
High Net Worth Individuals (10.1%)
Mass Market Retail Investors (35.2%)
Source: Aberdeen Standard Investments, based on data from
Wind, CSRC, NSSF, UBS-F, as at June 2016
Figure 6: Value of Share Trading (USD Billions)
0
5000
10000
15000
20000
25000
2019 (YTD until Feb 19)2018201720162015
Shenzhen
Stock Exchange
Shanghai
Stock Exchange
LSE GroupEuronextDeutsche
Boerse AG
Japan Exchange
Group Inc.
NYSE
Source: World Federation of Exchanges, February 2019

12
A-Share Inclusion in Major Indices
May 2018 saw the very first introduction of these
domestically listed China A-Shares into the main MSCI
Emerging Markets Index. Approximately 5% of the listed
A-Shares were included (Hong-Kong listed H-shares had
been included for some time and formed a large part of
the index already).
On February 28th 2019, MSCI announced that it would
increase the weight of A-Shares in the Emerging Markets
Index, by increasing the inclusion factor from 5% to 20%
in three steps. This will result in A-Shares becoming a
3.3% weight in the index from the current 0.71%. This
inclusion reflects China’s progress in liberalising and
opening up its market to this foreign investment.
“May 2018 saw the very
first introduction of these
domestically listed China
A-Shares into the main MSCI
Emerging Markets Index.”
Foreign investors have only been able to trade
domestically listed Chinese shares in US dollars since
2002, when the government introduced the Qualified
Foreign Institutional Investor (QFII) scheme. However, at
this time there were stringent quotas on the amount that
these approved firms could trade, and lock-up periods
for certain types of funds.
The QFII program has since been superseded by the
‘Shanghai-Hong Kong Stock-Connect’ system, launched
in 2014, by which international investors could trade
in Chinese securities with far more flexibility and
fewer restrictions. This has since expanded to include
more eligible securities listed in both Shanghai and
Shenzhen, and is a further step towards the gradual
internationalisation of the Chinese renminbi.
In the past, the market has been extremely volatile with
the exchange implementing trading suspensions based
on stringent positive or negative moves. Further inclusion
of A-shares would require further improvements from the
Chinese authorities – for instance, the ability to access
hedging and derivative instruments which are currently
restricted for foreign buyers.
Why Did We Invest When We Did?
We originally bought a tactical position in Chinese
A-Shares in October 2018, after the benchmark (CSI300
Index) comprised of the 300 largest Shanghai and
Shenzhen-listed firms had suffered a peak-to-trough
drawdown in the price level of over 36%. That month had
seen notable levels of market instability, with volatility
spiking to a level only seen once in the prior two and a half
years and stocks valued at a level not seen since 2015.
Chinese stocks had been under pressure all year since
their peak in early January. Several factors had combined
to cause this weakness, which continued to weigh all year.
The US Federal Reserve have been steadily raising their
benchmark interest rates since 2016; the rate rose from
1.5% to 2.5% over the course of 2018 and this had the
effect of pulling global capital back to the US away from
riskier Emerging Markets, including China. Increased
interest rates also increase the debt repayments of
Chinese or emerging market companies who had issued
US dollar-denominated debt – a double whammy when
combined with a weaker domestic currency due to, in
part, divergent interest rates versus the US.
Global economic growth, seemingly so stellar in 2017,
began to falter in 2018 as activity indicators started
to turn negative and corporate profitability weakened
marginally, led by China as the government reigned in
credit growth. Investors, fearful of an end to China’s
resilient economic growth and the knock-on effects on
the world economy, had begun to pull out of Chinese
stocks in favour of more defensive assets. The spectre
of the US-China trade conflict was at the forefront
of investors’ minds with the focus on global stocks
especially sensitive to international trade. As the year
Figure 7: Stock Trading Suspensions
0 500 1000 1500 2000 2500 3000
2018
2017
2016
2015
2014
Source: Shenzhen Stock Exchange, December 2018

13
progressed with both sides exchanging barbed language
and imposing tit-for-tat tariffs on one another’s exports,
sentiment turned further into negative territory. Finally,
the Chinese government had been in the midst of
‘deleveraging’ and de-risking the economy throughout the
year, reining in access to credit and causing consumer
confidence to plummet.
Matters reached a head in October, with two common
measures of a stock’s value – the price-to-earnings ratio
and price-to-book value – both falling to levels which we
found compelling, relative to their medium-term history.
Moreover, at similar times in the past, significant rallies
had occurred in the proceeding months after stock
values had fallen to comparable levels. Despite obviously
slowing economic growth, corporate earnings forecasts
had not deteriorated to the extent that the market was
discounting, and indeed had actually expanded the gap
to other emerging markets.
At the same time, we believed the signs coming out of
both camps regarding the trade war had begun gradually
to turn more positive. Both sides indicated that they
would be working towards a deal, or at least a suspension
of tariffs. This has subsequently proved correct, with the
market rallying in December on the news that President
Trump would be postponing the planned tariff increases
in search of an acceptable deal. Investors also continue
to look for signs that the stimulus enacted by the Chinese
government in response to the economic slowdown will
begin to bear fruit, with markets rising in anticipation of
both events.
Overall, we believe the roadmap for Chinese equities
to be a positive one, with several medium to long-term
tailwinds in their favour. Potential benefits include: a
potential resolution to the trade war; inclusion into
global indices; significant stimulus from the Chinese
Government in the form of tax cuts; infrastructure
spending; and credit easing to support domestic demand.
Figure 8: CSI300, P/E and Average P/E
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
Price
01/02/2019
01/11/2018
01/08/2018
01/05/2018
01/02/2018
01/11/2017
01/08/2017
01/05/2017
01/02/2017
01/11/2016
01/08/2016
02/05/2016
01/02/2016
02/11/2015
03/08/2015
01/05/2015
02/02/2015
03/11/2014
01/08/2014
01/05/2014
07/02/2014
5
7
9
11
13
15
17
19
21
23
25
Price-to-Earnings Ratio (P/E)+1 SD–1 SDAverage P/E
Price-to-EarningsRatio
CSI300IndexLevel
Source: Bloomberg. Data correct as at 7th March 2019.
Correlation
The A-Share market developed in relative isolation from
international capital flows, with few foreign investors
following or paying much attention. As such, the
market tended to – and still does to a large extent –
react to domestic rather than external factors. It is well
documented that speculative, sentiment-driven factors
drive the market to a significant degree, as opposed to
company and macroeconomic fundamentals.
As such, significant global market events that affect for
instance the US or European markets tend not to move
A-share indices to a similar degree. This is because the
vast majority of their revenue is domestically sourced and
many companies are not as affected by global business
cycles or interest rates. Because of both these factors,
Chinese stocks have historically been uncorrelated to
other major equity markets held in investor portfolios.
Asset Class 5 Year Correlation
US Equities 0.07
European Equities 0.07
UK Equities 0.00
Japanese Equities 0.19
Emerging Markets Equities 0.09
Developed Market Equities 0.08
Global Corporate Bonds -0.04
UK Government Bonds 0.08
US Government Bonds 0.28
Source: Bloomberg, based on monthly data in USD correct as at
28th February 2019. A zero figure shows zero correlation, a positive
figure shows that the two assets move in tandem, and vice versa.
The higher or lower the number, the stronger the relationship.

Because foreign investor ownership is so low, the A-share market is also less susceptible to the ‘capital flight’ that
can occur in other emerging markets. However, on the flipside, the high level and direction of retail trading often
bears little relation to the wider business and economic environment in China, with stock prices often deviating far
below or above their fundamental value based on positive or negative momentum and short-term sentiment. This
is true also for sectors, with the below chart showing how different areas of the market can go from ‘hero to zero’
year-to-year.
Figure 9: Discrete Calendar Year Sector Performance
2010 2011 2012 2013 2014 2015 2016 2017 2018
Communication Services -21.07 -7.2 5.89 7.81 31.66 -18.81 -12.85 29.31 -4.45
Real Estate -18.36 -7.63 16.39 -10.59 18.11 60.58 -4.19 117.86 -17.04
Consumer Discretionary -8.94 -16.77 27.75 27.01 27.21 34.3 -25.58 -8.34 -19.34
Information Technology 11.47 -29.08 24.94 15.2 27.02 3.08 -21.43 42.29 -20.45
Materials 11.78 -28.67 -17.24 -1.25 98.05 41.91 -4.19 28.13 -20.82
Energy 5.65 -12.17 5.81 -9.37 89.32 20.01 -7.83 92.81 -21.72
Financials -22.28 -5.45 4.22 75.67 11.91 -5.78 -28.76 40.97 -23.23
Utilities -15.73 -10.35 8.38 31.63 44.76 42.58 -16.24 72.16 -24.98
Industrials 16.91 -25.44 40.86 37.53 84.65 5.7 -19.97 21.27 -28.52
Health Care 41.58 -23.34 12.1 -11.25 97.42 18.54 -6.06 53.33 -30.54
Consumer Staples 27.75 4.54 15.96 57.69 25.4 57.54 13.86 50.43 -35.71
Source: Bloomberg. Data correct as at 31st December 2018
Lastly, something that has and continues to draw the ire of the US is that the renminbi is a heavily managed currency.
The People’s Bank of China (PBOC) – the Central Bank – sets daily ranges in which the currency can trade, meaning
volatility is somewhat dampened, making investing in RMB-denominated stocks more predictable and lessening one
source of risk. Stocks also benefit from the support of Government-backed buyers in times of market stress, to try
and stabilise markets and improve sentiment.
Benefits of Inclusion in Main Indices
Further inclusion in mainstream indices should continue
to further spur investor interest and sentiment towards
A-shares, at least in the short term as larger institutional
investors reposition their portfolios to be more in line
with the relevant benchmarks (although it should be
noted that most of the inbound flows from foreign
investors happened in advance of the official inclusion).
Inbound flows into A-shares reached a record just shy of
$8bn in January 20197
, with 10 of the prior 12 months
seeing net inflows.
Furthermore, it sends a powerful endorsement for many
international investors to consider this market for the
first time when previously it had been considered too
niche, risky or irrelevant for many portfolios.
In terms of how it could affect Chinese stocks
themselves, increased flows into and ownership of
A-Shares could mean a longer average holding period for
these securities, and an expansion of a market driven
more by stock fundamentals than short-term momentum.
International investor money tends to be ‘stickier’
and less susceptible to short-term sentiment, and as
such, they have more of an incentive to help improve
corporate governance, which has historically fallen short
of standards expected in the West.
7
Allianz, Bloomberg
“As the A-share market develops,
not only in world indices but also
as the companies grow in size and
influence, we believe investors
would be unwise to ignore the
opportunities available.”

15
Further Structural Tailwinds
As recently as 2009, Chinese retail sales measured in
US dollars were less than half of the US, at just less
than $2 trillion versus over $4 trillion; by 2018, this gap
had nearly converged and is set to overtake the US. With
Chinese consumers becoming both wealthier and more
discerning, there is major scope for domestic firms to
profit from this shift in purchasing and travel habits.
Moreover, Chinese citizens are among the most digitally
embedded in the world, with online retail making up
12% of total consumer goods purchases in 20158
, the
highest among large markets, opening up opportunities
for creative and profitable use of data.
World-leading Chinese companies have emerged and we
expect they will continue to do so. For instance, China has
two of the largest electric vehicle battery manufacturers
in the world, four of the largest solar panel manufacturers
and three of the largest home appliance producers9
.
China’s economic model partly depends on government
subsidies for favoured industries, and with easy access
to US technology seemingly less dependable than in the
past, sectors such as processing and memory chips,
clean energy technology and artificial intelligence are
set to benefit.
Heavy structural tailwinds also exist for firms with
exposure to the Belt and Road Initiative (BRI), a $2 trillion
project to connect four billion people in 65 countries.
We have recently documented this scheme in detail
in our ‘New Silk Road’ thematic project, presented at
the London Stock Exchange in February. This presents
a once-in-a-generation opportunity for companies in
sectors as diverse as construction, materials, education,
transport and IT services.
Conclusion
A-shares are, relative to other global indices, more
geared into domestic Chinese economic activity: in
2018, approximately 86% of the Shenzhen index’s
revenue was generated domestically, versus 28.5% for
the FTSE 350, 61.4% for the S&P 500 and 50.7% for
the Eurostoxx 60010
. As such, an allocation to A-shares
is a ‘pure play’ (a direct, specific avenue to invest on a
theme) on the opportunities the Chinese economy has
to offer, and we believe this to be a fertile hunting ground
for active managers owing to the retail consumer-driven
inefficiencies and irrational momentum built into the
market.
The benefits for portfolio construction are also abundant:
the lack of correlation to many other assets, not to
mention simply equities, is pronounced. As the A-share
market develops, not only in world indices but also as
the companies grow in size and influence, we believe
investors would be unwise to ignore the opportunities
available. However, given the volatile nature of the
market, as shown for instance by the swings in sector
performance year-to-year, investors also need to
understand the risks and unique features that make
Chinese A-shares so compelling for those with the ability
and patience to take advantage.
8
Source: Deloitte, based on data from the CECRC (https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/cip/deloitte-cn-cip
china-online-retail-market-report-en-170123.pdf)
9
Source: Alliance Bernstein, based on data from Deutsche Bank, HIS, Macquarie Research, UBS, AB and other company data
10
Source: Factset

Executive Summary
• The automobile industry is to be dominated with Electric Vehicles
(EV) by 2030 according to Bloomberg study.
• 2018 new car sale figures suffered heavily as a result of the newly
implemented Worldwide Harmonised Light Vehicle Test Procedure
(WLTP).
• China is expected to have over 50% of the EV market by 2025 as
a result of heavy government subsidisation.
Peter Doherty
Associate Director

11
5G: 5G performance targets high data rate, reduced latency, energy saving, cost reduction, higher system capacity, and
massive device connectivity essential for connectivity of vehicles 17
Changing Gears in the Auto Industry
The current state and future of the auto industry
The automobile (auto) industry is currently experiencing a period of momentous change, the type not witnessed
for almost a century. The last tectonic shift of this effect was the adoption of assembly line production to replace
individual hand crafting of the Model T Ford beginning in 1908, the efficiency of which changed the blueprint for car
manufacturing, bringing the unaffordable and scarce ownership of vehicles to the masses.
Today’s changes, although of a similar magnitude, are not being influenced by just one manufacturer, or even just the
auto sector, but by many technologies and industries. We are at the cusp of the electrification of vehicles becoming
mainstream: in Norway, close to 50% of all new car sales are now electric vehicles, although heavily subsidised.
According to Bloomberg New Energy Finance (BNEF), sales of electric vehicles will increase from 1.1 million worldwide
in 2017 to 11 million in 2025, and then surge to 30 million in 2030 as they become cheaper to produce than internal
combustion engine (ICE) cars.
Of course, this is only part of the story that is unfolding. We are also moving towards fully autonomous cars in the
future and vehicle connectivity (think ‘robo-taxis’ or ’mobility-as-a-service’).
Each of these changes is solving a particular inefficiency in the way we have
hitherto utilised cars. Electric vehicles generate approximately 66% lower
emissions relative to today’s average combustion engine and so are more
environmentally friendly (though we appreciate the dependant factor is
how the electricity is generated – another big megatrend). The automation
of vehicles aims to make road travel safer and more convenient: initial
tests have shown an 87% reduction in accidents relative to human drivers.
Finally, connected vehicles in the form of ‘ride-hailing’ is expected to lead
to more efficient use of vehicles and shorter travelling times.
The planning involved for the move to automation provides a somewhat predictable and clear path for the advancements
in autonomy. Changes to government legislation in planning to move forward with electrification, alongside car
manufacturers not wanting to be ‘left behind’, is shifting billions of dollars into the development of electrification,
taking away the perceived ‘unknowns’ of whether this technology will become mainstream. The development of 5G11
networks and related infrastructure spend required to enable connectivity of vehicles is reshaping the future for
connected transport.
Figure 10: Short Term Electric Vehicle Sales Penetration by Country
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
Rest of the WorldChinaUSEurope
2021202020192018201720162015
Source: IHS Markit, International Energy Agency (IEA), July 2017
“We are at the cusp
of the electrification
of vehicles becoming
mainstream.”

Auto
nomous Vehicles
Radar
LIDAR
Actuators
Vision Sensors
Domain Controls
Connected Ve
hicles
Connected Services
Fleet Management
In-Car Entertainment
Networking
Cloud Computing
Electric Vehicles
Batteries
Electric Motors
Power Electronics
Electric Architecture
Charging Infrastructure
12
The OECD compile Leading Indicators for the major economies around the world. They compile a mix of economic and survey data to
anticipate turning points in economic activity relative to trend six to nine months ahead, continue to anticipate easing growth momentum
in most major economies. For more information please see http://www.oecd.org/sdd/leading-indicators/
Key Investment Areas
Despite the strength of such megatrends, as investors we must recognise the cyclical nature of investment themes.
With regards to the transformation of the auto industry, we remain aware that despite such powerful long-term drivers,
the purchase of automobiles is highly cyclical and the transformation described above is still subject to regulation,
legislation, tariffs and technological shifts that may deem original investment projections null and void.
To a certain extent, most of the investment themes relating to the electrification and automation within the automobile
industry experienced headwinds through 2018 as a result of slowing Chinese and global growth, new industry
regulation in Europe which stalled manufacturing, and the threat of US tariffs.
Global Growth Slowdown
Taking these in more detail, the global growth slowdown
experienced through 2018 impacted almost all markets
and cyclical industries. Opposite, we show the year-on-
year percentage change in global leading indicators12
,
which indicate future growth. We can clearly see the
downturn coming from late 2017 into 2018; in this
environment, cyclical industries suffered, along with
broader financial markets through 2018, and auto-
related companies were no different.
New Regulation in Europe
With regards to new regulation in Europe, an old ‘lab
test’, now ironically named the New European Driving
Cycle (NEDC) designed in the 1980s, was replaced by
the Worldwide Harmonised Light Vehicle Test Procedure
(WLTP) to measure fuel consumption and CO2 and
other pollutant emissions from passenger cars. The
new regulation came into effect from September 2018.
The changes, driven by evolutions in technology and
driving conditions, involved moving from a test based
on a theoretical driving profile to the WLTP, which tests
real-world driving data, therefore better representing
everyday driving profiles.
The impact of this regulation was that car manufacturing
essentially ground to a halt through 2018 due to the
new test having to be taken by each new car that was to
be sold in the EU. The issue for manufacturers was that
the complexity of the new test relative to the old test
meant it took more time to complete. In addition to this,
for a certain car type, each powertrain configuration is
tested with WLTP for the car’s lightest (most economical)
and heaviest (least economical) version. This means
that for cars with many different ‘options’ or ‘extras’,
each variation of those needs to be tested for the
manufacturer to offer the options to the customer. You
can imagine how many tests just one car would have to
go through with such wide variety of options.

19
Figure 11: European OECD Leading Indicators
-3
-2
-1
0
1
2
3
-3
-2
-1
0
1
2
3
CLI, Normalised, Stock or Quantum, SA, Normalised - Portugal
CLI, Normalised, Stock or Quantum, SA, Normalised - Spain
CLI, Normalised, Stock or Quantum, SA, Normalised - Italy
CLI, Normalised, Stock or Quantum, SA, Normalised - United KingdomCLI, Normalised, Stock or Quantum, SA, Normalised - France
CLI, Normalised, Stock or Quantum, SA, Normalised - Germany
CLI, Normalised, Stock or Quantum, SA, Normalised - Euro Zone
201920182017201620152014
Figure 12: Global Developed Markets OECD Leading Indicators
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
CLI, Normalised, Stock or Quantum, SA, Normalised - Japan
CLI, Normalised, Stock Or Quantum, SA, Normalised - Euro Zone
CLI, Normalised, Stock or Quantum, SA, Normalised - OECD Total
CLI, Normalised, Stock or Quantum, SA, Normalised - China
CLI, Normalised, Stock or Quantum, SA, Normalised - United States
201920182017201620152014
Source: OECD, Factset, March 2019

Since the introduction of the WLTP, most countries in Europe suffered double-digit losses in new car sales, including
the five major markets. Germany, which saw a 25% surge in sales during August, suffered a 30.5% drop in September
2018. Italy’s sales dropped 25.4%, while the UK saw registrations fall 20.5%13
. Spain and France were better off, with
falls of 17% and 12.8%, respectively.
As a result, auto component manufacturer stock prices fell significantly due to slashed earnings forecasts as the new
regulation hit their output, irrelevant of how tied into the electrification or automation of vehicles they were.
Falling Car Sales in China
In China, after 30 years of annual year-on-year increases
in car sales, 2018 saw a fall of over 15%. Unlike the new
regulation in Europe, we cannot find any direct cause for
this other than slowing growth and consumers becoming
more cautious on spending, particularly on ‘big ticket’
items such as cars. There is a potential link in that the
crackdown on credit growth, risky borrowing and peer-to-
peer lending may have curbed sales by reducing loans
for car purchases. A further point to note is that the
car market in China’s most developed cities is saturated,
where in ‘first-tier’ cities 80% of respondents to a
Financial Times (FT) survey14
said they were car owners,
versus ‘third’-tier’ cities, where wages tend to be lower
and car ownership is closer to 63%. In addition, the car
fleet in China is relatively young; the FT survey showed
65% of consumers surveyed bought their car within the
last three years.
13
Source: Autovistagroup.com
14
FT Article: China steers clear of auto industry stimulus, for now (17th Dec 2018)
Figure 13: Eurozone New Car Registrations Growth (%YoY)
-30
-20
-10
0
10
20
30
40
Jan-19
Apr-18
Jul-17
Oct-16
Jan-16
Apr-15
Jul-14
Oct-13
Jan-13
Apr-12
Jul-11
Oct-10
Jan-10
Apr-09
Source: Factset, March 2019 (For commentary on new car registrations, please use the European Automotive Manufactured
Associations monthly commentary: http://www.acea.be/statistics/tag/category/passenger-cars-registrations)
Figure 14: China Passenger Car Sales (%)
-10%
0%
10%
20%
30%
40%
50%
60%
Dec-18
Dec-17
Dec-16
Dec-15
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
YoY
Source: Bloomberg, March 2019

15
Bloomberg New Energy Finance
16
Source: Factset, March 2019 21
We also note that in the 2015 Chinese economic
downturn, the government introduced a stimulus
policy where a purchase tax on cars with up to 1.6
litre engines was halved between October 2015 and
2016 to stimulate demand. This effectively frontloaded
purchases and car demand. Consumers aware of the
government’s prior stimulus may now be holding off
purchases in hope of a repeat.
China has also been heavily subsidising electric vehicle
sales, which have led to expectations that Chinese sales
will account for almost 50% of the global EV market by
2025 and 39% in 203015
. China leads on percentage
adoption, with EVs accounting for 19% of all passenger
vehicle sales. Earlier this year however, the government
announced a reduction to EV subsidies to encourage
local manufacturers to rely on innovation rather than
government assistance, as the industry matures and
costs fall.
So where is the investment opportunity with such a negative backdrop?
As with all megatrends that are subject to cyclical growth,
it is important to acknowledge that these themes go
through periods of very high optimism (normally when the
broader cyclical backdrop is very positive and supportive
of the industry) and periods of concern, exemplified in
2018 for the reasons above.
As investors, we think about the ultimate drivers of
megatrends and whether or not they are sustainable.
Are the factors impacting the industry permanent or
transitory in nature? With the example of slowing global
growth or the introduction of the WLTP regulation, we
would argue these to be transitory. Global growth will
continue to evolve and be accepted at lower or higher
rates. In the same vein, once manufacturers adjust to
the new WLTP regulation in Europe, this will no longer
be a headwind, but could become a tailwind. The WLTP
will become the standard economy and emissions test
for all EU countries, India, South Korea and Japan,
which means that manufacturers need only one type
of approval test to be able to sell the same model in
all these regions. Ultimately, this should reduce the
cost and time taken to get type approval because there
will no longer be a need to perform multiple different
emissions tests around the world.
In the case of China eliminating subsidies, this will
ultimately spur more competition and ensure survival of
the industry winners, while potentially impacting demand
in the short term.
In reviewing investment funds linked to this sector, we
have seen a meaningful underperformance relative to
a broad index of global equities. A basket of stocks we
track linked into electric components and auto suppliers
lost over 25% throughout 2018, underperforming the
wider market, which only fell c. 9% in US dollars.16
Should there be further weakness in the global economy
or further tariffs implemented on the global auto industry
by the US, these companies could very easily suffer
further. However, the old adage rings true in the case
of megatrends: be greedy when others are fearful and
fearful when others are greedy.
Figure 15: China leads the charge as electric
vehicle sales seen surging globally
2%
14%
26%
38%
50%
62%
Rest of WorldUSEuropeChina
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
%ofglobalEVsales
Source: Bloomberg New Energy Finance
(forecasts from 2018), March 2019
“The old adage rings true in the
case of megatrends: be greedy
when others are fearful and
fearful when others are greedy.”

22
Pakistan Restricts Airspace Indefinitely
The Pakistani Government has restricted the airspace
near the border with India indefinitely following
Indian airstrikes in Pakistan and subsequent aerial
engagement between fighter jets of each country. The
closure of the airspace has caused costly and time-
consuming detours affecting around 800 commercial
and cargo flights per day. It is estimated that the
shutdown has already cost airlines and airports
more than $1 billion. Afghanistan's lost airspace
royalties have had a reported cost of $12 million18
.
Imran Khan, Prime Minister of Pakistan, branded
the attack a political move by Indian Prime Minister,
Narendra Modi. Khan claims that it is an attempt to
gain re-election stating, “We are repeatedly asking
India to have bilateral trade and resolve the issue of
Kashmir through talks but, unfortunately, a political
party in India wants to win the election by spreading
hatred.” Analysts have suggested that by putting
national security back on the agenda and drumming
up nationalist support Mr Modi has bolstered his re-
election campaign.
A Power Struggle in South Africa
State-owned power supplier, Eskom, has delivered rolling
blackouts to residents of South Africa, leaving them with
as much as 25% less power due to a number of faults. The
devastating Cyclone Idai, which struck Mozambique on 14th
March, has exacerbated the issue as the usual imports
of hydroelectric power have been significantly disrupted.
The so-called ‘load-shedding’ in South Africa has caused
concern that power outages at clean-water reservoirs could
restrict the supply of drinking water.
Goldman Sachs estimates that the current blackouts will
have shaved 0.3 percentage points off Q1 GDP and, should
they continue, a reduction of 0.9 percentage points for the
year – the daily cost so far to the South African economy
is $140 million. This creates a problem for President Cyril
Ramaphosa who is attempting to improve public support for
the African National Congress ahead of upcoming elections.
A Deteriorating Venezuela
The situation in Venezuela continues to
deteriorate with the country suffering its
longest power outage in history. Information
minister Jorge Rodrigues confirmed
businesses and schools would remain
closed, while opposition leader Juan Guaidó
has made accusations of murder after as
many as 17 people are reported to have
been killed by the lack of power to intensive
care units. The US Secretary of State,
Mike Pompeo, stated that the US would be
withdrawing all remaining diplomats from its
embassy in Venezuela as the presence of
such diplomats had “become a constraint
on US policy”.
Venezuelan debt, which has more than
doubled in a decade, is held by a diverse
set of creditors who are beginning to pursue
sovereign litigation, meaning the country
is likely to go through one of the most
complicated debt restructurings in history.
Around
the World
18
Source: CAPA – Centre for Aviation
19
Source: Goldman Sachs, 'South Africa – Load
Shedding Economics', 20 March 2019

23
Central Bank Interventions Fail to Boost Hong
Kong Dollar
A rise in US interest rates in 2018 and inflows
into China’s stock market has led to Hong Kong
having to defend the local currency’s peg to the
US dollar by selling almost 2 billion US dollars
to buy the HKD in March. This is the sixth time
the Hong Kong Monetary Authority has had to
intervene in March to support the currency.
As China’s A-shares market thrives, investors
are selling Hong Kong dollars in order to buy
offshore renminbi used to purchase stock,
suppressing the currency. The intervention
poses some risk to mortgage borrowers in
Hong Kong, as the weaker currency provides a
more conductive environment for interest rates
to normalise in line with the US. This in turn
pushes up borrowing costs for homeowners.
Malaysia
In what has spiralled into arguably the biggest financial scandal in Malaysian
history, former Prime Minister Najib Razak has been indicted on multiple charges
surrounding the disappearance of c. $4.5 billion from the state investment fund,
the 1Malaysia Development Berhad (1MDB). The fund was created by Razak shortly
after he came to power a decade ago and was tasked with elevating the Malaysian
economy through investments in green energy and tourism. After billions of dollars
were successfully raised, debt levels soon became excessive and reports emerged
that Razak was siphoning hundreds of millions of dollars from 1MDB into his
personal bank account. Since losing the 2018 election and attempting to leave the
country, Razak has had his assets seized. Goldman Sachs is also being sued and
criminally prosecuted for its role in helping to raise investment funds, much of which
was allegedly used to pay bribes to high ranking officials.

24
The Asset Markets
A Quarterly Review of the Major Asset Classes
All data sourced from Bloomberg as at 31/03/2019 unless stated otherwise.
Developed Market Equity
Performance: Equity markets saw a marked
reversal of fortunes in the first quarter of 2019
as investors allayed fears of economic stress
and Federal Reserve tightening to post a strong
return following the weakness at the end of 2018.
In January Jay Powell, chair of the US Federal
Open Markets Committee, alluded to a slower
rate of rate rises in the US – moving the market’s
expectations from four rate rises in 2019 in the
US to none; a catalyst for almost all asset classes
to appreciate.
US Equities led a broad-based rebound, with major
indices all returning over 13.5% on a total return
basis, but with the technology heavy NASDAQ
composite leading the way by rising 16.8%. The
smaller cap Russell 3000 marginally outperformed
also, rising 14.6%.
European equities returned 11.9%, reflecting
their slightly more defensive nature, and the lower
return expectations given ongoing uncertainty in
the European economy, particularly in Germany.
UK equity market returns eschewed continuing
Brexit uncertainty, once again reminding investors
that domestic equity markets are heavily
international in nature. Returns however were
dampened by an appreciating Pound, with the
FTSE 100 returning 9% in Sterling terms. A delay,
and the perception of avoidance of a disorderly
Brexit led to a small rally in domestic equities as
well, but these remain heavily discounted relative
to history.
Japanese equities saw support from a weakening
Yen but also struggled to keep pace with broader
equity markets, and while they saw a marked
improvement to Q4 2018, a 6.6% total return
appears sluggish compared to other global
developed markets.
Valuation: It is worth noting that there has been
very little fundamental change to global corporate
earnings in the last 6 months, with much of the
markets machinations reflected in changing
valuations alone. US equity valuations, in terms
of forward Price to Earnings multiples, troughed
as low as 14.5x in late December as the market
sold off. Following the market recovery, valuations
have returned to levels similar to those observed
through the majority of 2018 and in line with
medium term averages of around 16.7x.
UK Equity valuations have seen a similar
appreciation but remain cheap relative to global
counterparts, reflecting perceptions of continued
political and economic risk. By some metrics this
discount has reached levels not seen in over 10
years vs. European equities.
In Europe, the same Price to Earnings ratio
stands as just under 14 times. Given the recent
rebound in markets, we have seen a re-rating
upward over the quarter from lows of 12 times.
We are still below our five-year average of 14.7
times, although the extreme ‘cheap’ valuations
as at the start of the year have reverted. When
compared to other developed markets Europe
remains relatively cheap, with the US continuing
to command a premium on a P/E basis.
The Asset Markets
Total Return % Change,
Local Currency
3 month % change 6 month % change 12 month % change
MSCI United Kingdom +7.8% -3.5% +2.7%
MSCI USA +13.3% -2.7% +7.3%
MSCI Europe ex UK +11.9% -1.3% +1.5%
MSCI Japan +6.6% -11.9% -6.0%

25
The Asset Markets
Japanese company valuations have also continued
their modest appreciation also, with a forward
Price-to-Earnings multiple up from 12.6x to 13.4x.
Although an increase, Japan still remains cheap
relative to other Developed Markets (c.12%
discount on a P/E NTM basis), except perhaps for
UK equities.
Outlook: With the Federal Reserve now on pause
for at least the short term, equity markets will likely
focus on the continuing tensions between the US
and China. While the impact to corporate earnings
thus far has been relatively small, we have seen
that investor sentiment can be very sensitive to
any news flow from either side on the subject.
Investor sentiment could well influence whether
we see a potential glut of IPO’s this quarter, with
household names like Uber, Airbnb and Pinterest
all rumoured to be interested in going public.
The outlook for the UK remains dominated by
Brexit, and in the longer term the potential
for a General Election and yet further political
uncertainty. We are very aware that valuations are
cheap and the potential or equity market returns
is larger than many other equity markets, but with
a cloud of uncertainty over the future economic
and political settlement, investors seem set to
wait for clarity before returning to the sector. Risks
to the downside appear to have been muted in
the past few months as fears of a no-deal Brexit
recede, but these have brought further uncertainty
in terms of timescale, and potential government
change. We retain that risks to the downside can
be larger in the short term, and binary risks remain
difficult for the market to price. With this in mind
we remain cautious on the medium term, but are
sanguine that politicians will not ultimately vote for
a materially worse economic situation.
Although wage inflation is growing in Europe, it is
not yet translating into the broader HCIP inflation
figures. This is putting pressure on the ECB as
to what measures they need to put in place to
keep the region’s economy in positive territory.
With political uncertainty in Germany, France
and Italy, the outlook is mixed. We are seeing a
slow economic recovery from the last quarter of
2018’s malaise, although there are still a number
of global macroeconomic headwinds which could
impact Europe given how open its economy is.
The outlook for Japanese equities remains muted
as one-year forecasted short-term earnings growth
continues to lag the five-year consensus long-term
earnings growth implying a longer-term view is more
attractive than the short term. The trend, however,
has been for longer-term forecasts to come down
in line with shorter-term estimates. We believe
this reflects the markets reticence towards Abe’s
economic reforms. Investors wait to see whether
the BoJ’s estimates for a 0.5% inflation print by
the summer 2019 will be accurate or not.
Emerging Market and Asian Equities
Performance: Emerging Markets (EMs) rebounded
strongly in Q1, on a total return basis returning
10.0% (in USD terms) in the first three months of
the year following the dismal 2018, specifically
Q4, performance. This brings the one-year
performance of many individual countries back
into positive territory.
The notable outlier and driver of returns has
been the rally in Chinese stocks with the MSCI
China market rising 21.6%; domestically focused
‘A-shares’ have done even better at over 36%.
Global trade-sensitive indices in South Korea and
Russia have also performed well, returning 5.0%
and 12.2% respectively.
Some of this rally can be attributed to a ‘mean
reversion’ – where stocks returned to normal
levels – following the strong sell-offs in October
and December 2018. However there has been
some good news as well: the US and China appear
to be fairly close to some kind of deal in their trade
war, the US Federal Reserve has paused its rate-
rising programme and Chinese economic data has
begun to bottom out or even inflect upwards.
Market Price to Earnings (P/E) Price to Book (P/B)
MSCI Emerging Markets 12.89 1.60
MSCI India 26.37 3.10
MSCI China 14.05 1.77
MSCI Brazil 14.73 2.08
MCSI Russia 4.98 0.98
MCSI Korea 9.07 0.89
Data correct as at 29th March 2019. Source: Bloomberg

26
Valuation: As mentioned above, valuations have
returned to levels close to their 15-year average,
at just under 13x last year’s earnings on a Price
to Earnings basis (LTM P/E) and 1.6x on a price
to book basis. India remains the most expensive
major market at over 26x LTM P/E, with Russia
valued much more cheaply owing to the political
risk discount and energy-focused economy.
Versus other developed markets, EMs trade on
a perennial discount to most Developed Markets
(DMs), with EMs now cheaper than Europe, Japan
and the US having been briefly comparable at the
end of 2017.
Outlook: Overall, we are more positive on the
asset class than in Q4, however, the risks remain
balanced in our view. Global growth indicators and
economic indicators appear to have stabilised or
bottomed out following the rout last year, which
should be supportive of risk assets like EM
equities than in 2018.
The Fed has paused on raising rates, for now,
with their dovish tone providing some relief rather
than active support for world equity markets. The
divergence of monetary policy between the US
and the rest of the world was one of the main
reasons for EM weakness in 2018. Furthermore,
a slowing Chinese economy also concerned
investors last year – stimulus enacted by the
government has perhaps now begun to bear fruit.
It put in place income and sales tax cuts, loosened
the infrastructure-credit purse strings and freed
capital within banks to lend to businesses.
January and February economic data was weak,
however, green shoots are emerging in the form
of some leading economic indicators inflecting
upwards, domestic investor sentiment improving
and employment growth rising.
Elsewhere,concernshaveeasedovertheupcoming
Indian general election where the incumbent,
Narendra Modi, is expected to lose seats but
retain power along with close allied parties. The
simmering border conflict with Pakistan has
proven to be a boon for his nationalist, security-
focused campaign.
The post-election honeymoon for Brazil’s
President Jair Bolsonaro has ended as attention
turns to his chances of passing critical pension
reform. The country’s fiscal sustainability is
under judgment and although the economy has
recovered from a crippling truckers' strike last
year, helped by a surge in exports of iron ore and
agricultural products to China, the currency has
fallen this year as the market’s focus returns to
the significant fiscal deficit of 6.95% of GDP and
rising government debt. Pension reform will go a
large way towards addressing this.
Global Government Bonds
Performance: Government bond yields in the US
continued to fall, culminating in the first yield
curve inversion since 2007. After breaching the
psychologically important 3% mark in 2018, the
US 10-year yield fell to 2.45% on the 22 March,
less than that of the 3 month bond. This particular
inversion measure has preceded the last seven
recessions, but investors remain sanguine with a
‘this time it’s different’ sense of optimism. Many
commentators suggest that the 10-year yield is
up to 100bps lower than it should be, artificially
depressed by years of quantitative easing. The
reaction has been muted so far, with volatility back
at multi-month lows and equity markets continuing
to motor on. This is partly due to a continuation
of the Fed’s change in tact, with a zero percent
chance of a rate hike in the year to come currently
priced in, easing the tight financial conditions that
many blame for the market’s weakness seen in
Q4 2018.
In the run-up to the initial Brexit deadline 29 March,
UK 10-year Gilt yields dropped to the lowest level
seen since September 2017, at 0.99%, as vote
after vote was defeated in the House of Commons.
The possibility of a ‘no deal’ Brexit became
somewhat more possible and bond markets have
almost fully priced in the damage to future growth
that this episode of uncertainty is likely to cause,
regardless of the final outcome.
The Asset Markets
Total Return % Change,
Local Currency
3 month % change 6 month % change 12 month % change
MSCI Emerging Market +9.6% +1.0% -9.6%
MSCI China +18.0% +5.3% -8.0%
MSCI India +6.0% +4.4% +11.7%
MSCI Russia +11.8% +0.9% -3.1%
MSCI Brazil +7.0% +20.3% -7.5%

27
The Asset Markets
Italian bond prices rose during the period, with the
10-year yield finishing the quarter at 2.49%, and
spreads versus comparable German and Spanish
bonds remain elevated as political worries remain.
Germany found its benchmark 10-year yield in
negative territory for the first time since October
2016, highlighting the growth concerns in Europe,
and the likely path of monetary policy in Europe as
a result. Notions of a retreat from QE this side of
the Atlantic are now almost dead in the water and
are unlikely to resurface if the European economy
continues on its current trajectory.
Outlook: After years of the US leading the charge on
an exit from QE and monetary policy ‘normalisation’,
the Fed has been uncharacteristically dynamic
in its policy stance. Following a softening of key
leading indicators and an appreciation of the wider
global growth picture, it has been made clear that
the current Fed will try to avoid any policy errors
like some of their predecessors. The result is
likely to be limited downside in bond prices with
the potential for upside price shocks in the case
of unexpected policy rate cuts.
Other central banks, such as the ECB, had only
begun introducing rate hikes and normalisation
into their rhetoric in the second half of 2018
but now see zero chance of any material policy
changes in this respect. In contrast to the US,
there is little upside from here as yields remain at
multi-year lows. Subsequently, an opportunity has
arisen in corporate bonds, with both investment
grade and high yield debt selling off materially and
providing a good entry point for investors looking
to exit government debt.
In both European and UK government bond
markets, the big question of Brexit is very likely
to be the biggest driver of returns over the next
quarter at least. The UK has seen a parallel
downwards shift in the yield curve over the quarter,
with the short end depressed by the increasingly
dovish stance of the Monetary Policy Committee
and the long end dampened by discounted future
growth rates, both attributable to the ongoing
Brexit negotiations. Of course, this could reverse
in fairly short order should a resolution be reached,
but recent events have proved that any predictions
should be treated with caution.
Global Corporate Bonds
Performance: Having seen global corporate
bond yields ‘blow-out’ at the end of the fourth
quarter, all markets have delivered relatively
strong performance in the first quarter of 2019.
This is particularly encouraging given that the
Investment Committee agreed to take advantage
of the valuations at the beginning of the year,
rotating away from government securities and into
corporate credit, effectively taking on a marginally
higher level of risk. The fall in government bonds
offered reward to investors taking interest rate
risk in corporate debt, although between half and
two thirds of the decline in corporate bond yields
is explained by the credit risk element, through
the compression in spreads.
As credit spreads narrowed approximately 25
basis points in the period, UK Sterling Investment
Grade (IG) bonds recorded an impressive 4.1%
total return for the quarter. In local currency,
European and US IG bonds recorded gains of
3.2% and 5.0% respectively. Through our Global
Investment Grade strategy, we have exposure to
each of these markets. The riskier, High Yield (HY)
bond market recorded the strongest gains in the
corporate bond complex, within which US bonds
in particular performed strongly with gains of 7.5%
during the period.
Outlook: Having highlighted at the end of the 2018
that European IG credit spreads were trading at
their highs of the past five years, and that US and
UK markets appeared to show good value, our
decision to then increase our exposure to this
market was immediately rewarded, for the short
term at least.
Given a strong rebound in the asset class since
the end of last year, we consider whether the
opportunity set has already run its course or
whether there is more yet to come. Looking
simply at credit spreads, there would appear to
Bond Yields % (10 year) 29 March 2019 31 Dec 2018 28 Sep 2018
United Kingdom 1.00% 1.28% 1.57%
Germany -0.07% 0.24% 0.47%
France 0.32% 0.71% 0.80%
Japan -0.09% -0.01% 0.12%
US 2.41% 2.68% 3.06%

28
be plenty of room for further compression, which
would generate additional attractive returns.
Approximately one year ago, UK IG credit spreads
were as low as 110 basis points, compared with
current levels of 159 basis points; in Europe and
the US the low for each market is approximately
30 basis points below current levels.
However, we should remind ourselves of the market
conditions at that time compared with now. At the
beginning of 2018, the global economy continued
to ride on the wave of synchronised growth that
the consensus had expected to continue into the
medium term. Today, the global macro backdrop
is quite different; as explained previously in the
report, slowing economic activity in Europe, Asia
and more recently North America, has refocused
investors’ attention towards the timing of the next
recession and the risk of deflation resurfacing.
The deterioration in the macroeconomic outlook
has been acknowledged by central banks. A
proactive Fed that has announced a pause in
interest rates and plans to put the balance sheet
normalisation on hold has, in turn, prompted
the ECB to take a more dovish tone. Together,
this led to government bond yields falling, which
implicitly provides support to corporate bonds
assuming that spreads remain constant. Despite
the rally in government bonds this year, further
yield compression would perhaps appear quite
commanding, although if the markets increasing
expectation of US rate cut later this year
materialises, then perhaps this might materialise.
On balance, as a credit investor, the downside
risk from potential higher interest rates is less
concerning that it was last year. While there also
remain certain factors that provides support to
credit spreads at these levels, an improvement in
the UK political outlook or progress in US-China
trade talks to name a few. We maintain a modest
overweight which, relative to equities, should
also provide some balance to portfolios should
volatility pick up once more.
Property
Performance: In February, UK Commercial Property
rose 0.2% on a total return basis, providing year
to date performance (to the end of February) of
0.5% as measured by CBRE’s UK Monthly Index.
Again, both headline capital values and rental
value growth were negative (-0.3% and -0.1%
respectively). However, this was solely driven by
the Retail sector which, on a standalone basis,
saw total return (-0.5%), capital values (-1.0%)
and rental value growth (-0.4%) fall for the sixth
consecutive month. Over the last three months,
UK Commercial Property posted total returns of
0.4%, while capital values fell 0.9% and rental
value growth fell by 0.1%. This allowed equivalent
yields to rise 6bps, with certain assets beginning
to look more attractive.
Outlook:TherewassomerespiteforUKCommercial
Property in the first quarter of 2019, as the asset
class showed some correlation with wider capital
markets. After one of the strongest recoveries
since 1987 in equity markets, UK Commercial
Property followed suit after consumer confidence
picked up and signs of resilience against ever-
present Brexit risks became apparent. Total
returns also picked up; however, the asset class is
somewhat behind the growth rates seen over the
last few years. Investors are likely to be cautious
until there is more clarity around Brexit, while the
Retail sector in particular has an unenviable task
of repositioning itself to remain relevant in the
face of online competition.
Within sectors, divergence continued particularly
between Retail and Industrial assets with the
former now yielding more than the latter for the first
time (see UK Retail article for more information).
The Office sector continues to motor on as
developers still find themselves playing catch up
after a construction drought in the aftermath of
2008. Of course, it remains to be seen what effect
there might be depending on the outcome of the
Brexit negotiations on the sector.
The Asset Markets
Corporate Bond Yields % 31 Mar 2019 31 Dec 2018 30 Sep 2018
Global Investment Grade 2.92% 3.42% 3.29%
US Investment Grade 3.71% 4.26% 4.14%
US High Yield 6.74% 8.01% 6.53%
Europe Investment Grade 0.85% 1.26% 1.09%
Europe High Yield 2.89% 3.68% 2.98%
UK Investment Grade 2.68% 3.04% 2.99%

29
After a battering of Central London residential
property prices, there has been signs of stability
to suggest that there may be a floor around the
corner. The best performing market in 2019
so far has been that of Edinburgh, but also the
surrounding areas; Lothians, Stirling and Fife.
Commodities
You may recall oil prices fell dramatically during
the final quarter of 2018. WTI Crude Oil fell sharply
form a high of $76/bbl to as low as $42/bbl,
just in time for Christmas Eve, before recovering
slightly to end the year at $45/bbl.
Fears of the negative impact on global economic
growth, and so demand for oil, of further US
interest rate increases, coupled with a glut in
the supply of oil, including a surge in US shale
production, were among the major factors driving
the oil price and many other asset markets at that
time.
The first quarter of 2019, however, has seen WTI
Crude Oil rally to $60/bbl. A number of factors
were at play during the first quarter of the year:
expectations of increased OPEC production cuts,
lingering issues in Venezuela and Iran - respectively
the 11th and 5th largest oil producing nations -
and increased optimism that the US-China trade
spat would soon be resolved.
Gold has been quite volatile so far in 2019, but
the price remains significantly above the lows
witnessed last summer, fuelled by the same
factors that had caused the oil price to weaken
and reflecting the metal’s status as a safe haven
investment. In August of last year, gold was
languishing at around $1,184/ounce, but by late
February the price had risen to $1,347/ounce, a
gain of almost 14%, before ending the quarter at
£1,298/ounce, a mere 1% gain so far this year.
Silver has followed much the same pattern as that
of gold. Copper, on the other hand, a bellwether
for the global economy, finished 2018 at around
its lowest level for the year. Since then, the thaw
in US-China trade relations, a surprise rebound
in Chinese manufacturing activity ,a rapid (but
probably temporary) drop in LME inventory plus
supply disruptions in Chile, Peru and beyond have
helped copper to a gain of almost 12% during
the first quarter of the year. Other metals prices,
nickel (+23%) and zinc (+20%), have also bounced
significantly thus far in 2019.
Agricultural commodities continue to exhibit
weaker trends among food prices. Thus far in
2019 prices of corn (-5%), coffee (-6%), orange
Juice (-5%) and soybeans (-1%) are all down.
Planting intentions are closely watched as they
are key indicators for future prices, but their
remains a great deal of uncertainty in the market
as a result of the ongoing US-China trade war and
because of US farmers reacting to lower prices by
planting less of one crop (soybeans) and more of
another (corn).
The Eurozone Purchasing Managers’ Index
(PMI) continued to drift lower as the year drew
to a close, with this widely watched index and
barometer of future growth posting a final reading
of 51.1 versus 52.7 in November (a reading of
50.0 signals zero growth).
In a bid to support prices, OPEC-plus-Russia met
to discuss potential production cuts, however,
they could not come to an agreement. Increased
inventories in the US also weighed heavily on the
oil price and the US President, Donald Trump,
warned against any attempts to raise prices
which could potentially stifle economic growth.
Elsewhere, trade hostility between the US and
some of its trading partners began to bite in Asia
and China in particular, further hurting global
growth prospects and resulting in downward
pressure on commodity prices as a whole.
Within metals, there were few positive headlines
to report with Gold (-2.9%), Silver (-9.7%), Copper
(-16.2%), Nickel (-15.0%) and Zinc (-25.1%)
registering significant falls in 2018. Palladium
shone, however, as the move in Europe away
from diesel fuelled vehicles was accompanied
by the introduction of new emissions standards
in China. This has led to an increase in demand
for the metal which is used in both catalytic
converters and hybrid vehicles causing Palladium
to usurp Gold as the world’s most precious metal,
it reached highs of $1,254 $/oz.
Agricultural commodities had a somewhat mixed
year with considerable price divergence amongst
food prices. The cold weather earlier in the year
unsurprisingly had a detrimental effect on crop
yields, constricting supply in corn and driving the
price up 4.1% over the year. Conversely, Coffee
prices suffered the same fare as metals, falling
20.8% during the year.

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