The Lowdown on Markets to 3rd March 2017
World Markets at a Glance
In this week’s issue
- Whilst global markets adopt a wary stance, Wall Street hits a new peak.
- President Trump addresses Congress, whilst Fed chair, Janet Yellen, talks hawkishly.
- So far this year the developing markets continue to out-perform those of the developed.
- The political uncertainties in Europe are affecting investor and market sentiment.
- Short duration US Treasury yields rise to their highest levels in more than seven years.
- The momentum in global equity markets remains positive but for how much longer.
“Global investors continue to buy into the pro-growth and recovery story”
Whilst the global equity markets adopted a slightly more cautious approach towards the end of the week’s trading, this did not stop the US stock market indices recording yet another round of record highs. This continued positivity was initially buoyed up by Wednesdays address to the US Congress given by the US president, Donald Trump. Then towards the end of the week, The Fed chair, Janet Yellen disclosed her current views on interest rates and future central bank policy.
It would seem that a week does not go by when we are not writing, or talking, about the new Trump administration, and because of this, many portfolio managers appear to have struggled with the effects of the continual media statements and twitter remarks that seem to affect our markets. Indeed, in the last 10 months we appear to have seen conventional wisdom being floored, firstly, it was thought that the UK would vote in favour of remaining in the European Union, and secondly, the pundits said that Donald Trump would not win the US presidential election, both were wrong in the outcomes.
Also it was thought that if the unthinkable were to happen, Brexit and a Trump win, then it would be bad news for the markets, but instead both the UK and US indices have prospered and consequently recorded all-time highs. This in itself has created a period of investor prosperity, or disappointment, depending on whether you embraced risk, or engaged into a cautious investment approach. Clearly, you could have made a sensible case for taking either position, given that we still do not know what the longer term effects will be from Brexit, and of course, new President elect Trump, still needs to carry out those promises of, spending more, tax less, and relax bank credit and regulation.
Clearly, the US economy is in a recovery mode, with US output and corporate earnings looking much more robust than in previous years, therefore, any further assistance from “Trumponomics” is likely to be of further benefit to both the US economy and potentially the stock market. Understandably, there is some concern that the Federal Reserve Bank might need to raise interest rates faster and by more than the market is expecting, which could dampen down investor sentiment, but the tailwind from the economic advancement could neutralize any US tightening woes.
“The US economy is in a recovery mode”
However, in respect to the UK, there are expectations that the economy might suffer from a further slowdown, given that we are expecting a “hard Brexit” and higher inflation over the coming months, therefore, as a result of this, the UK consumer might become more inward thinking given that they might have less disposable income. Equally, from an investment perspective any further weakness from sterling should have a positive effect on the FTSE 100 Index, given that over 80 per cent of its corporate earnings come from overseas. Also the index is benefitting from the turnaround in oil and commodity prices and related company earnings.
Arguably, global equity markets have been in the spotlight since the US presidential election result in November 2016, but perhaps even more importantly since March 2009 when the markets bottomed out from the financial crisis of 2008. However, what has been astonishing is the strength of the Asian and emerging markets in recent times, which again, the analysts were predicting would have a very difficult time ahead given their concerns over higher US interest rates, a stronger US dollar, and talk of protectionism. In actual fact, the reverse has actually happened with the developing markets now outperforming the developed in 2017.
And so what has actually happened is that these regions have become very investable again, after many years in the wilderness. Certainly many of the stocks are much cheaper than their American counterparts, and perhaps less so dependent on the commodity sector. Indeed, 30 per cent of the emerging market index is now made up of technology businesses, and with so many consumers now embracing the new era of online spending, and industries preparing for automation and robotics, a swathe of these companies are likely to benefit in the coming future.
This is not to say that other regions such as Europe are not attractive, in fact, there are numerous high quality businesses that are not only cheap, but profitable, and are supported by positive and sustainable earnings growth. Understandably, there are currently political uncertainties to take into account, but this can give global investors a unique opportunity to invest into some compelling long-term growth stories at an attractive entry point.
“With every investable opportunity comes a certain amount of conviction and credence”
But of course, with every investable opportunity comes a certain amount of conviction and credence which is either fulfilled over time or delivers disappointment. Clearly over the last few months global investors have embraced the pick-up in positive sentiment, whether it has come from better-than-expected economic data, or what is now been heralded as “Trumponomics”.
Interestingly enough, the yield on the US 10-year Treasury note seems to be less concerned about the Trump reflationary trade given that it seems to have flatlined in recent times rather than move higher on worries about the possibility of higher interest rates and inflation. Of course, this might be due to other forces at work given that the rising number of retirees maybe buying more bonds given their safe haven status, which in turn, is likely to keep yields relatively low.
Meanwhile, in the foreign exchange market we have seen the US dollar hit its highest level against a basket of its peers since early January. This is mainly due to a sudden increase in sentiment that the Federal Reserve Bank will raise interest rates this month and then be more pro-active throughout the rest of the year. But of course, a disproportionately stronger dollar is exactly what the Trump administration does not want, given their intent to put “American First” and be a competitive player in the corporate world.
“The likelihood is that the pound will eventually gain some momentum and experience a better year than it had in 2016”
In respect to sterling the overhang from the invoking of Article 50 later this month is likely to create a further period of uncertainty for the currency, but the likelihood is that the pound will eventually gain some momentum and experience a better year than it had in 2016. None-the-less much will depend on the political events both at home, in Europe and across the Atlantic.
Finally, the world’s biggest stock index, the S&P 500, celebrated its 60th birthday on Saturday, and with a value of almost US$2.4 trillion, spanning across many of the most valuable companies in the world, it has become the most popular index in the world. Prior to the 04th March 1957 Standard & Poor’s had run four separate indices, industrials, transportation, utilities and financials but then they decided to combine the four to form the S&P 500 Index
Peter Lowman Chief Investment Officer
Peter Lowman Chief Investment Officer Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .
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