Market Commentary – 17th May 2017

Global News

It has in the main been a quiet week, punctured by further News that President Donald Trump has been everything but presidential, in that he has reportedly interfered with an FBI investigation. To be honest I do not think anyone really cares if this is true or not, we just want the tax and fiscal promises that were promised to be enacted and delivered. If not then we do not have 18 months left in this cycle, we maybe only have six months so much of what everyone is expecting for 2018 is dependent on the action. We all here at OCM hope he focuses on his agenda and gets on with it, but the political aristocrats will continue to do everything they can to continue attacking him until he is impeached. I do not like the man, or his actions, but I do like his policies as they will extend the economic cycle and give Europe, Japan and the UK a chance to get some real growth into the system before the US raises rates so high that it cools their economy and also the rest of the world.

Closer to home numerous parties have issued their Manifesto’s and Labours reminds me of the ones that Neil Kinnock used to produce many years ago and before him Michael Foot. It is not that I do not agree with the ideological principles, it is just that these ideologies have to be funded and taxing businesses which are the life blood of the UK economy would be catastrophic. Despite that I would pay more tax to see an end to tuition fees! As regards to the rest of the world it has been a quiet week overall with data sets being very much mixed. We will continue to watch and report more next week on the individual areas.

Barometers

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 91% of the companies in the S&P 500 reporting actual results for Q1 2017), 75% of

S&P 500 companies have beat the mean EPS estimate and 64% of S&P 500 companies have beat the mean sales estimate. Earnings Growth: For Q1 2017, the blended earnings growth rate for the S&P 500 is 13.6%. If 13.6% 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%) just before the US was downgraded and Europe fell back into a recession!!!!!

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 go lower with corresponding valuations rising. This is reversing today though so it is just the usual high level volatility that we are all getting used to and is the reason why we stay away from 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. Following last week’s Investment Committee Meeting, 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 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.

Over the last week, Sterling has weakened against the Yen and the Euro but remained flat against the US$. This is because the US$ has weakened also and bears no reflection on any underlying strength in the GBP to USD cable rate. We still expect Sterling to weaken as we transition past the election and enter the period of continued rate rises in the US and issues over Brexit whilst the German elections are unresolved between now and October. After October, we expect Sterling to start strengthening again as the two leaders talk.

GBP / USD – Range 1.32 – 1.20 – Today 1.29
GBP / EUR – Range 1.22 – 1.12 – Today 1.16
GBP / JPY – Range 150 – 130 – Today 145.7

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 a strong global economy. Opposite reflects underlying weaknesses.

The price of oil, over the past week Oil has moved up by 3.30% and is trading at $48.86 for WTI Crude and $51.87 for Brent, revering the previous week’s decline. The issues are still on the oversupply and not demand which is positive for any inflationary impact.

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 stabilise and rise to $1,248 a troy ounce. The gold price is stabilising and rising as risk returns to the markets as concerns are rising that Donald Trump has interfered with the FBI probe.

Model Portfolios & Indices

Over the last week, we have again seen a significant increase in all the portfolios and the returns compared to benchmarks have again excelled, due to the asset allocation and conviction behind the asset allocation. We continue to favour equity over non-equity on the basis that although equities are considered to be expensive on a current earnings basis they are not on a forward earnings basis. With the US coming in and giving earnings growth of over 13% in Q1 and with Europe delivering more than this, we are happy to maintain the position.

If sterling does depreciate this will give a currency boost and we may decide to lock that in in the short term. Other than that, we will continue being invested and observe the data and hope that we do not see a significant event like North Korea attack South Korea or President Donald Trump being impeached as that would derail this optimism. Overall though the portfolios are doing exceptionally well, volatility is low and we continue to watch and evaluate risk. When we think the risk, reward reflects limited upside and significant downside potential we will act as we always have. Today though we see no reason to be defensive accepting we will have a period of negativity because no bull run is a straight line up. It must be ridden though and we have to leave the day to day management to the underlying fund managers.

Last Week in History

As I supported our friend Stuart last week and because there is no news for this day in History that I like, I have added back what would have been in last weeks.

On this day, (9th May 1994), Nelson Rolihlahla Mandela was sworn in as South Africa’s first African president. He was a South African anti-apartheid revolutionary, politician, and philanthropist, who served as President of South Africa from 1994 to 1999. He was the country’s first African head of state and the first elected in a fully representative democratic election. His government focused on dismantling the legacy of apartheid by tackling institutionalised racism and fostering racial reconciliation. Ideologically an African nationalist and socialist, he served as President of the African National Congress party from 1991 to 1997.

As always have a lovely week and we will continue to watch and evaluate. Stay safe and enjoy the weather…

 

VBW

 

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