Latest News From Gohil & Gunby
- 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.