Market Commentary – 3rd May 2017

UK Parliament dissolves ahead of general election!


In a week that has been relatively quiet, we have had mixed economic data and geopolitical noise, the equity markets have remained positive, continuing the trend from the outrun of the first stage French election result. Ahead of the final stage of the election process in France and the election next month in the UK, the markets are positively poised, believing that despite the elections still to happen, there is more clarity over the likely outcome. Election campaigning officially starts today as Theresa May visits the Queen to gain formal approval for dissolution, where the Prime Minister is expected to travel to Buckingham Palace for a private audience with the Queen, after which the race to Number 10 begins.

That means we will again head to the polls on June 8, with Theresa May seeking to strengthen her mandate ahead of what are widely expected to be tough Brexit negotiations. As it stands, if the pollsters are correct it should result in a majority for the conservatives of about 100 seats, noting I for one do not trust the polls. As regards to our harmonious discussions with Europe, Theresa May held a working dinner for European Council President Jean-Claude Juncker and Michel Barnier, the EU’s chief Brexit negotiator, at Downing Street last Wednesday night, telling them she wanted a “deep and special partnership with the EU”. Following the meeting Brussels said Theresa May is living in a “parallel reality”, and Jean-Claude Juncker and Michel Barnier said the Prime Minister has demanded a “detailed outline” of a future free trade deal before the UK agrees to pay any money to Brussels, as part of the Brexit divorce deal. Theresa May has insisted that she is “not in a different galaxy” from her EU counterparts after Juncker warned that talks could collapse, because of the gulf between London and EU on key issues.

Global Economic News

In the UK, we have had mixed data with the ONS’ preliminary estimate that GDP grew by 0.3% in Q1 confirmed expectations of a slowing in the UK economy, whilst data yesterday confounded analysts with a surge in April’s manufacturing PMI to 57.3 from 54.2 the previous month representing a three-year high, and suggests that the sector is taking full advantage of the weak pound and a stronger world economy. Reassuringly, April’s strength was even more apparent in the domestic market, however, with manufacturing accounting for only a tenth of GDP, strength here will struggle against headwinds facing the dominant services sector. Overall, we are seeing a mixed picture for the UK economy with positive news from the manufacturing sector which has been aided by the weaker pound in the first part of the year, however consumer spending, which supports the dominant services sector, has slowed. The outlook is somewhat rosier than the picture painted following the EU referendum vote in June last year.

In Europe, France and Spain published flash GDP estimates for Q1, kicking off the cycle of Eurozone GDP results. French quarterly GDP growth eased from an upwardly revised 0.5% in Q4 to just 0.3%. This slowdown was partially offset by a small pick-up in Spanish GDP growth to 0.8% from 0.7% in Q4. The consensus was for growth in both economies to be unchanged from Q4. A sharp pick-up in German GDP growth is expected thanks to a good quarter from the industrial sector, which would help bolster the Eurozone Q1 GDP figure. April PMI survey data in the manufacturing sector continued to paint a rosy picture, reaching yet another high as firms reported greater output, new orders and employment – with both domestic and external orders increasing. This chimes with the PMI data from the UK, with the manufacturing data leading the way and the consumer spending sensitive services sector lagging somewhat.  In all, some scepticism about the strength of the business surveys is warranted, but their likely over-prediction of GDP growth does not mean that they should be ignored. With conditions improving, the possibility of a further pick-up in GDP growth in Q2 may be rising – don’t rule out GDP growth in 2017 getting close to or even hitting 2%. We view this as positive news from Europe and see a picture of an improving economic activity in the region.

In the US, while headline GDP growth disappointed in Q1 at only 0.7%, it was weighed down by temporary factors. Growth should accelerate through the rest of the year and average about 2% for 2017. The decline in the ISM manufacturing index to 54.8 in April from 57.2 in March, suggests that the more elevated readings in the past four months related to a burst of new orders had retreated to a more sustainable level. Activity in the manufacturing sector is now expanding more in line with the pace of underlying economic activity. Personal income posted a modest 0.2% gain in March while nominal spending was unchanged, however, adjusted for inflation, spending rebounded from weakness in January and February. Despite the modest March reading, the underlying trend in income remains positive, as income was up 4.5% y/y, the same gain as in February (which was the strongest since June 2015) and solid income growth should remain supportive of spending going forward. We currently expect consumer spending to rebound from a weak 0.3% growth rate in Q1 to around 2.5% in Q2, which will help bolster the Q2 GDP figure. B


The Barometers below look at some of the data we review on a day by day basis and by having these detailed, it gives you some insight into what is happening.

US Earnings are important because if the US starts to slow down then so does the rest of the world:

As of today (with 58% of the companies in the S&P 500 reporting actual results for Q1 2017), 77% of S&P 500 companies have beat the mean EPS estimate and 68% of S&P 500 companies have beaten the mean sales estimate. For Q1 2017, the blended earnings growth rate for the S&P 500 is 12.5% which is fantastic and far better than anyone anticipated. If 12.5% is the actual growth rate for the quarter, it will mark the highest (year-over-year) earnings growth for the index since Q3 2011 (16.7%).

UK & Non-UK Gilt Yields;

UK and Non-UK Government Debt are a good measure, as they indicate whether we expect the economy to improve or worsen, with rising yields reflecting positive environment and reflecting positive interest rate movements as we look out. The opposite with lowering yields as the expectation is worsening economic conditions.

Over the last week, we have seen bond yields in Europe and the US rise sharply and gradually in the UK with valuations down respectively. Volatility remains high in these assets that should not be functioning like this, which is a further example of why we are still not directionally investing into these assets.

GBP to USD/Euro/JPY;

We monitor the GBP rate to see how much of the returns are coming from underlying equity valuation increases and movement in the currency, to see if we should be locking in the gains and hedging the risks. Since the Investment Committee Meeting on the 2nd of May, we have changed our 12-month expected range for sterling across the US Dollar, Euro and Japanese Yen. This is to reflect a stronger pound and less negative risk due to the UK economic data stabilising and assumes that Theresa May gets a stronger hand, and therefore uncertainty risk is dropping off. We still though expect Sterling to weaken over the coming months as negotiations set off and both sides prevaricate, then reappreciate towards year end to roughly where we are now or slightly higher.

GBP / USD – Range 1.32 – 1.20 – Today 1.29
GBP / EUR – Range 1.22 – 1.12 – Today 1.18
GBP / JPY – Range 150 – 130 – Today 145.03

Oil Price;

We monitor the oil price as it is strong indicator of global consumption when balancing the output and storage data. Strong supply and usage denotes strong global economy. Opposite reflects underlying weaknesses.

The price of oil, over the past week has again moved down further and is currently trading at $48.00 for WTI Crude and $50.90 for Brent, down approx. 3.15% for WTI and approx. 2.3% for Brent. It is apparent that oil has been dropping for quite some time now. Yesterday, Brent Crude closed at its lowest level this year, erasing all the gains it has had since OPEC started to cut production. OPEC oil output fell for a fourth straight month in April as Nigeria and Libya pumped less Crude. We have also seen sharp technical declines in the prices after US futures fell below last week’s lows. The demand side is strong, the negative movement YTD is on the supply side.

Gold Price;

Gold is a safe haven and a spike in price can be an indicator of increasing underlying economic concerns and as always, the opposite.

Over the past week, we have seen gold prices drop further, approximately $13 an ounce to $1,253 a troy ounce. Gold prices sank after April’s ISM manufacturing survey crossed the wires. While the figures showed that the overall pace of US manufacturing activity growth slowed last month, an index of input prices paid by firms was stronger than expected. That may have stoked bets on higher inflation that might beckon a steeper Fed rate hike cycle. Tellingly, US Treasury bond yields and the US Dollar rose as the yellow metal fell. With some political uncertainty ahead, we could see periods where the gold price spikes, however, we do not expect much sustained upside potential for gold in the current environment, and although it is a good diversifier, we do not feel there is gain to be made accepting it is a safe asset.

Model Portfolios & Indices

The Model portfolios have done well over the week with the active models again outperforming the passive and benchmarks. We continue to monitor the internal components and had our Investment Committee meeting yesterday, in which we concluded that within all portfolios we can turn the oven up a little further and add a little more equity, as well as being more directional with OBI 8 and making it more aggressive than it has been so as to clearly differentiate the risks being taken and the underlying composition as per the mandate of the model.  The changes we are making and underlying actions are:-

  1. Within all portfolios, we sold down yesterday the Schroders Global Recovery fund and the Smith & Williamson fund. The Schroder fund continues to underperform the other global funds and we have decided to liquidate and diversify into other components.  The Smith & Williamson Enterprise fund is focussed on low volatility UK focussed investment at the expense of the potential return when markets rise, and we are therefore going to remove it temporarily from the portfolio as we add directionally more UK equity at the equity end of the portfolio that is long only focussed. ;
  2. At the same time where possible we will be using cash to move money into ISA’s;
  3. We will then complete a full rebalance on the 11th May, post the French election on Sunday and as long as there are no shocks;

These changes will be reflected fully in portfolios over the coming weeks and we will communicate to clients on the ISA utilisation or not. If we do not manage to fully utilise the ISAs at this juncture, please do not worry as we will have other periods during the year I am sure, where we will create cash in portfolios and can fully utilise at that juncture.

This Day in History

On this day in 1999, the Dow Jones Industrial Average closed above 11,000 for the first time in its history at 11,014.70. The industrial average was first calculated on the 26th May 1896, and the averages are named after Dow and one of his business associates, statistician Edward Jones. It is an index that shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second-oldest U.S. market index after the Dow Jones Transportation Average, which was also created by Dow.

As always have a great week and we will continue to watch and evaluate and if anything changes we will let you know.

Jason Stather-Lodge  CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager