Market Commentary – 25th January 2017
Teresa May faces rebellion?
As we reflect on the vote from the lawmakers yesterday Teresa May is seeing a small rebellion build from the Tory backbench in relation to how she proceeds with getting an Act passed to satisfy the ruling. Today, she has responded to the ruling in the Supreme Court by bringing forward her timetable for Brexit, which emerged as ministers vowed that the will of the people will not be “thwarted”. Sources say the Prime Minister will respond to the Supreme Court defeat by tabling a white paper detailing the Brexit plan as she stated last week, noting she wants to keep it simple and focussed on her plan. We also know in regard to what will be the European Union Withdrawal Bill, she has followed saying that she now wants to trigger Article 50 in mid-March, weeks earlier than was initially expected, and she believes both Houses of Parliament will vote to begin formal talks with Brussels. Despite the small rebellion, she is not fearful it will result in anything derailing her ambitions.
One of the biggest questions we are being asked at the moment is “how much does a Brexit hard or soft, impact on the asset allocation”
With the greatest respect to my lovely country the honest answer to that today is “not a great deal” from a global perspective, as a weaker currency will benefit investors in overseas assets. A falling currency against other global currencies is good for overseas investments held in our portfolios. Also, the UK is not the US and if the UK gets a cold, the global economy will continue to push forward. From a global perspective, now that the world has got used to the idea, there is no longer a significant economic impact from us leaving the EU that will be a shock to the world economy. From a UK investor perspective, we are seeing continued positive momentum of a reflation trade globally, which means non-equity assets are becoming toxic and investors are moving more and more cash into equity assets as they are optimistic that we will see strong earnings into 2017. This is supported by very positive economic data coming through for December illustrating the global economy was in the main strong as we ended 2016 and that momentum is continuing into 2017.
At home, we have seen UK stocks rally YTD despite Brexit concerns due to the foreign exchange impact on foreign earnings for UK listed companies, giving rise to revenues increasing by circa 15%. For those with low import costs that sell overseas, this is great news as the revenue increases drop straight to the profit line potentially increase earnings. This ultimately increases the share value, which is good for investors. Overall, for a UK investor with a globally diversified portfolio, a Brexit will have little negative impact, which will be good for the UK investor that holds overseas assets, due to Sterling’s continued weakness. However, do not be fooled, it is going to be a roller coaster and we will see periods of high volatility in UK assets.
We are though positioned correctly for the expected economic improvement globally and any noise around a Brexit will not derail that positioning, because fear of a Brexit will weaken sterling and that only helps the underlying profitability in the main for companies we invest into, and a stronger sterling will do the opposite but will only happen as fear dissipates, which will help maintain consumer spending and momentum. Overall therefore trying to second guess what will happen next based solely on the UK and Brexit is not something that concerns me on a day to day basis. The strength of the Barometers below does, as does the global reflation, trade on an expected ongoing momentum in the global economy. If that remains positive, we will remain invested and only change that if the outlook changes or we have a significant event driven scenario that increases risk.
Rest of the World
The last week for the rest of the world has been dominated with talk about Donald Trump and whether he will be able to get through the changes he has talked about and the UK / European relationship post Brexit. To be honest I am getting a little bored of both topics and the press trying to destroy the optimism surrounding both in favour of an attitude of pessimism. Both countries are strong and neither can be destroyed very easily and I would prefer to look at the world through an optimist half full glass with an eye on the pessimism rather than being a pessimist. Only the future will tell us and as far as Europe is concerned they need us as much as we need them, and for as far as the US is concerned congress has a habit of slowing down those bills that it does not like and speeding up those that it does. The US president is a figure head and is very limited to what he / she can do without support of congress and the senate together. All in therefore I wish the press would just stop clamouring for Armageddon on both sides of the Atlantic and give both a chance!
Global Economic Data
Over the last week, we have continued to see strong economic data with most data points exceeding expectations again or matching with very little sight of negative data. This is positive for the outlook for equities.
As mentioned last week, we are constantly looking at Economic data and have set a number of Barometers that test the outlook, and have selected the following six barometers to review. Therefore, please see below for our weekly review of these:-
US Earnings – As of Friday 20th January (with 12% of the companies in the S&P 500 reporting actual results for Q4 2016), 61% of S&P 500 companies have beat the mean EPS estimate, and 47% of S&P 500 companies have beat the mean sales estimate. The good news therefore continues and we are still on track to have a positive US earnings season for the end of 2016.
UK & Non-UK Gilt Yields; Over the last week we have seen bond yields fall as concern and rhetoric became negative around President Trump throughout the developed world. That has changed today, as the sentiment has reversed and optimism is again abound as we see equity markets rally. From a rate perspective we see the 10 year rates as indicators of whether markets are bullish or bearish. The sentiment in the yield falling has seen markets fall but as they rally they will reverse.
GBP to USD/Euro/JPY;
We have seen further strengthening in Sterling following the Supreme Court ruling as optimism grows that Teresa May can be controlled and London will get more of a soft Brexit than a hard. We feel this short term optimism is overrated, as no politician in reality has the will to stay in Europe if we are told by Europe that we have too to retain access to the single market. One thing that always brings the British people together is being told what to do by European politicians and if that happens it will only strengthen the resolve. We are still range bound for the three currencies as detailed below and asset allocation decisions will be altered if we move outside of these ranges as follows:-
- GBP / USD – Range 1.25 – 1.10 – Today 1.25
- GBP / EUR – Range 1.20 – 1.10 – Today 1.17
- GBP / JPY – Range 1.50 – 1.25 – Today 1.42
Oil has gone sideways over the week still trading at $52 for Crude and $55 for Brent. Overall over the month we are down slightly (circa 1%) but in terms of volatility, that is normal for this asset and still follows a period of significant increases with the annualised return at 67.15% for Crude and 68.47% for Brent. This stabilisation of price is in line with expectations.
Gold has rallied YTD and has regained the losses over the last six months, noting we are starting to see it sell off today as markets rally heavily. As we said last week, we are still down nearly $160 per ounce from its peak in September 2016. As an observation, the rally is a momentum trade because it was oversold, and the direction of it going forward will very much be dependent on the speed at which Donald Trump alters the policy in the US and the global economy trajectory. We watch the asset closely in line with the macro data and will use as and when we feel a period of risk not being rewarded starts to happen, subject to also taking into account the currency movement.
Indices and Model Portfolios
Over the last week, we saw the indices and model portfolios move negatively over fear of whether President Trump can do what he said, so there was a bit of a wobble. As I watch the markets today that wobble has disappeared and optimism is abounding, with most European Indices up nearly 1.5% which will be very good for our positioning. The US and Asia had positive sessions overnight that will also be reflected in the prices tomorrow, so as we move towards the end of the month we expect to see January being positive and directionally the total opposite of January 2016. It is important to note as we move throughout the year that we will always see strong periods of positivity and then a wobble, which is normal market behaviour. The key focus is the trend and the trend is definitely positive as the global asset rotation continues and investors move from non-equity into equity. In perspective, last year there was $3 trillion moved from US government debt into US equities according to M&G, which equates to an enormous amount of capital moving from assets that are now considered toxic to those that are in favour. We see no reason today why that trend will not continue.
This day in History
On 25th January 1905 at the Premier Mine in Pretoria, South Africa, a 3,106-carat diamond is discovered during a routine inspection by the mine’s superintendent. Weighing 1.33 pounds and christened the “Cullinan,” it was the largest diamond ever found. Frederick Wells was 18 feet below the earth’s surface when he spotted a flash of starlight embedded in the wall just above him. His discovery was presented that same afternoon to Sir Thomas Cullinan, who owned the mine. Cullinan then sold the diamond to the Transvaal provincial government, which presented the stone to Britain’s King Edward VII as a birthday gift. Worried that the diamond might be stolen in transit from Africa to London, Edward arranged to send a phony diamond aboard a steamer ship loaded with detectives as a diversionary tactic. While the decoy slowly made its way from Africa on the ship, the Cullinan was sent to England in a plain box. Edward entrusted the cutting of the Cullinan to Joseph Asscher, head of the Asscher Diamond Company of Amsterdam. Asscher, who had cut the famous Excelsior Diamond, a 971-carat diamond found in 1893, studied the stone for six months before attempting the cut. On his first attempt, the steel blade broke, with no effect on the diamond. On the second attempt, the diamond shattered exactly as planned, Asscher then fainted from nervous exhaustion.
The Cullinan was later cut into nine large stones and about 100 smaller ones, valued at millions of dollars all told. The largest stone is called the “Star of Africa I,” or “Cullinan I,” and at 530 carats, it is the largest-cut fine-quality colourless diamond in the world. The second largest stone, the “Star of Africa II” or “Cullinan II,” is 317 carats. Both of these stones, as well as the “Cullinan III,” are on display in the Tower of London with Britain’s other crown jewels; the Cullinan I is mounted in the British Sovereign’s Royal Sceptre, while the Cullinan II sits in the Imperial State Crown.
As always have a great week and we look forward to reporting on the month of January as a whole next Wednesday as we close January.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager