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Asset Allocation Changes and Market Commentary

During October the SCM investment team switched one of the local government emerging debt ETFs (representing 3.0% of the portfolio) to reduce the ETF related costs by 43%, whilst increasing the yield whilst maintaining the credit quality and maturity.

Source: Bloomberg, Morningstar

The Portfolio continues to hold no UK Government bonds as we believe there are more attractive yields available via a mix of UK corporate bonds, together with overseas corporate and government bonds.  Currently, 10-year UK Government bonds yield 0.7% per annum vs 3.1% per annum from the average bonds within the  SCM 50/50 Bond Reserve / Absolute Return.  Furthermore, it is likely that whichever UK Government is elected on 12 December, Government spending and debt will rise significantly.  Moody’s recently placed the U.K.’s Aa2 credit rating on negative outlook, citing “no matter what the outcome is of the general election Moody’s sees widespread political pressures for higher expenditures with no clear plan to increase revenues to finance this spending”.

According to a recent Bloomberg article, ‘Johnson or Corbyn, Fiscal Bang Is No Bad Thing’ the Conservative spending proposals would require borrowing an extra 20 billion pounds (c. 1% GDP) a year whilst the Labour spending proposals would be 55 billion pounds a year or a little under 2.5% GDP. Labour’s proposals would take government investment as a share of GDP close to 4.5%, doubling it in nominal terms. Both parties would increase investment as a share of GDP above its long-run average, with Labour taking spending back to levels not seen since the 1970s.However, whilst one might expect higher spending to lead to higher debt issuance and higher yields, this is not necessarily the case. There was a record 228 billion pounds of bonds sold in the 09/10 fiscal year following the credit crisis, but UK government bond yields actually fell by 0.75 percent.  It can be argued that the circumstances are different today as during 09/10, interest rates and bond yields were falling worldwide, and many governments were significantly increasing their borrowing.  One thing is clear, there are many different factors that determine government yields.  For example, Japan has one of the highest debt to GDP percentages in the world but one of the lowest government bond yields:Source: Bloomberg                            Alan Miller – Chief Investment Officer, 19th November 2019