Latest News From Gohil & Gunby
- A Market Overview From Quilter Cheviot
The last week has all been about political non-events (and the World Cup). Both trade disputes and Brexit politics have created a lot of noise but have had little impact on markets with the FTSE 100 opening this week very marginally below where we closed a week ago. This is not to say that either subject is not important with significant implications for economic progress and future market levels, but that recent events have not given any additional clarity on either subject. Equity markets are very efficient in discounting future expectations but we are no closer to knowing what scenarios we should be discounting.
Trade disputes, initiated by the USA, can be seen as a combination of domestic positioning ahead of the mid-term elections and a negotiating trap laid by President Trump designed to provoke a counterproductive response by foreign governments. Despite multiple ministerial resignations over the UK’s Brexit position we are no close to knowing the form of Brexit to expect, or even if it will happen. If anything, all that has changed is that a reasonable compromise is less likely. It is appealing to think that the markets’ attention will turn to fundamentals as the second quarter earnings season begins, but with news of Boris Johnson’s resignation breaking whilst I have been writing this it is probably too much to ask.
- An Economic Overview From Quilter Cheviot
Another week, another political crisis in the UK. Theresa May’s new soft Brexit strategy, agreed at Chequers on Friday, has been undermined already after David Davis resigned from the Cabinet. He also roundly criticised her negotiating strategy in his resignation letter, claiming it will not deliver on the mandate given by the result of the referendum.
What happens now is anyone’s guess but it seems likely that Theresa May will persist with her new strategy and will therefore face a leadership challenge from the Tory Brexiteers led by Jacob-Rees Mogg. If she faces them down, then a very soft, Norway-style Brexit is in the offing. If she loses, a hard Brexit or possibly a general election would seem likely. So far, markets have reacted quite calmly to the news but will be closely watching the reaction of other senior Cabinet ministers.
From an economic perspective, the situation is increasingly absurd – we are 8 months away from leaving the EU and the government cannot agree what it wants from Brexit. They are disagreeing not over minor details, but fundamental questions about the future direction of the country and the economic relationship with our biggest trading partner. While Mark Carney was talking up the UK economy last week and markets are still cautiously pricing in a rate hike in August, this could easily be overtaken by events.
Elsewhere, the economic news has generally been pretty good in most parts of the world although the increasingly hostile trade rhetoric is a cause for concern. This week, US inflation numbers will be released alongside UK monthly GDP numbers.
Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.
- A Market Update From Quilter Cheviot
Last week stock markets had their first wobble in a while, driven by the rise in global bond yields. In a sense, strong job numbers in the US and the ability of companies to pay their employees more should be a welcome feature. However, markets will fret that higher wages are a result of a too tight labour market and that businesses are having to pay up to attract more staff. The key is whether any of this feeds through to higher inflation, something that central banks are, of course, charged with containing. The fact that stock markets have already had a strong run in recent months just makes the chances of a minor correction even more likely. It is worth putting this into context however. The previous two interest rate tightening cycles in the US were in 1994 and 2004. During these periods the US economy was performing well but the central bank, the Federal Reserve, feared that inflation might return. There then ensued a period of fairly rapid interest rate rises which hit bond markets quite hard. Equity markets were not immune from this, although the falls in the S&P 500 were limited to less than 10% on both occasions. Thereafter, stocks continued to perform well reflecting the continued growth in the economy and in company profits. This is the type of adjustment that markets are most likely experiencing at the moment. Major setbacks in markets, so-called bear markets, are more normally associated with economic recessions. Given the current improvement seen in the global economy, these conditions do not seem to be upon us any time soon.
The synchronous global economic upturn continues apace. Last week saw another strong set of surveys across the world from manufacturers, even in the UK where economic activity is lagging other advanced economies on Brexit uncertainty. Bond markets have become increasingly nervous about the consequences of central banks tapering quantitative easing and increasing interest rates, even if the latter are very minor at this stage. At the end of last week the US labour market report confirmed unemployment at a 17-year low but more importantly – at least for the bond bears – a pick-up in wage growth to 2.9% year-on-year. The US 10-year Treasury rose 20bp over the week to 2.86% and there were similar rises in UK gilts and German Bunds. Advanced economy inflation has bottomed out and will increase gradually in 2018 but there is nothing at this stage to suggest the central banks will panic and tighten monetary conditions more abruptly. This week sees surveys from the services side of the global economy and these are also expected to be strong.
Fundamentals for equity markets remain strong, the global economy is growing and corporate profits are rising. In this context the fall we are seeing is mainly a valuation correction that is a buying opportunity for investors prepared to take a slightly longer term view on the prospects for quality companies. We are advising investors to keep their discipline focusing on advantaged companies trading on sensible valuations.
- A Market Update From BROOKS MACDONALD
As I am sure you are aware capital markets are currently in a correction phase after a strong January and this can be seen in most equity markets.
This selloff can be attributed to two factors in our view, overconfidence in stock markets and concerns over interest rates/inflation.
January was one of the strongest months on record for equities and the positive return seen in the month was the 15th consecutive month of gains seen in the US index. With the optimism created by the Trump Tax reform many indices began to price in a significant amount of good news and by the end of the month some indicators were suggesting the market was overbought. We believe a significant amount of this recent move is attributable to investors selling risk assets after an extremely long tick up in equity markets amidst very low volatility – this is a healthy feature of a bull market. This correction does come at the same time however as bond markets have been selling off, albeit fairly gradually, since September of last year. The market’s attention became extremely focused on Friday’s US employment report with the release that US wage growth had increased 2.9% year on year, above expectations. Wage growth is a key indicator for future inflation and therefore investors have begun to price in higher inflation, and therefore higher interest rates that they believe central banks will need to adopt to combat price increases.
Our core view for 2018 remains unchanged, we expect inflation to tick up in the US towards the Federal Reserve’s target but for structural disinflationary pressures, such as technological improvements, to keep inflation under control. Corporate earnings growth has been positive and we note that of the US companies that have reported Q4 earnings, three quarters of them have exceeded analyst expectations and many have guided that 2018 will be better for their companies than the market is pricing in. Wage growth, if it continues, may start impacting profitability at some point however we are inclined to wait for further confirmatory signals before extrapolating the most recent data point forward. Some inflation, via wages, is positive for consumption and for the economy more broadly, so the key area we will be watching is whether wages carry on rising or whether this is merely bringing wage prices in line with where the US Federal Reserve wants them to be.
In summary we still believe equities are more attractive than bonds but are focusing on ensuring that portfolios are balanced ahead of 2018 which we expect to be more volatile than recent years. By investing in a broad range of themes, geographies and foreign currencies we are able to diversify equity risks. Similarly in the non-equity space we are looking to structured notes, convertible bonds and other alternative asset classes to help dampen the inherent volatility of equity markets.