Market Commentary – 7th June 2017

Election fever peaks as the Conservatives’ lead narrows

Theresa May and Jeremy Corbyn are making a last-minute push for votes, returning to their core themes as general election campaigning enters its last day. May will tour England promising Brexit will be a success while Corbyn speaks in England, Scotland and Wales, pledging to “save the NHS”.

We will keep a close eye on the outcome of the General Election tomorrow and we will give you our thoughts on the outcome on Friday.

It’s been suggested that Jeremy Corbyn and Scottish Labour leader Kezia Dugdale aren’t on the same page over the issue of a second independence referendum. It’s been suggested that Jeremy Corbyn and Scottish Labour leader Kezia Dugdale aren’t on the same page over the issue of a second independence referendum. It’s been suggested that Jeremy Corbyn and Scottish Labour leader Kezia Dugdale aren’t on the same page over the issue of a second independence referendum.Global Economic News

In the UK, as election day nears, the Conservatives’ lead in the polls has continued to narrow. The party started with such a large lead that anything other than an enhanced majority would be a major surprise and there remains a good chance that the majority will approach three figures. Away from the politics, economic data continues to show strength in the production sector but a more subdued picture in consumer-facing areas. The relative sizes of these sectors mean that this mix does not produce particularly strong GDP growth but we should at least see a quicker pace of expansion in Q2 than in Q1. Also, headline PMI from the CIPS manufacturing survey edged down from April’s two-year high of 57.3 to 56.7 in May. But this was still well above the long-run average and was indicative of a manufacturing sector which, at least as far as the business surveys are concerned, is in fair health. The detail of the survey was also encouraging, with robust growth in orders and output. And though the costs and prices balances remained high by historical standards, there are signs that inflationary pressures are easing in this part of the supply chain. The Organisation for Economic Co-operation and Development (OECD) has said it still expects the UK economy to slow over the next few years as Brexit hits business confidence and inflation squeezes consumer spending. Reaffirming previous forecasts, it said it expected UK GDP to slow from 1.8% to 1.6% for 2017 before dropping to 1% in 2018. It also warned that weaker growth could drive the unemployment rate above 5%.

In Europe, Investor sentiment rose in June to its highest level in nearly a decade. The Frankfurt-based Sentix research group’s eurozone index rose to 28.4 points from 27.4 in May, reaching its highest level since July 2007. It is the latest evidence that the bloc’s economic recovery is strengthening, as inflation and employment edge up. Research published early this week showed that growth in eurozone services sector remained at its fastest pace for six years in May. Retail sales expanded 0.1% on the month in April, undershooting market expectations of a 0.2% rise. In addition, the March rise was revised down to 0.2% from 0.3%. Thus, having already slowed sharply in Q1, retail sales figures suggest that households continue to feel the pinch from higher inflation this year. While strong levels of job creation will help to partially offset the decline in real incomes due to higher prices, it is expect that household spending growth might slow this year to 1.4% from 1.9% in 2016.

In the US, The trade deficit widened to $47.6 billion in April from a revised $45.3 billion in March. The wider deficit was the result of a rise in imports and a concurrent decline in exports. The rise in imports was driven by gains in consumer and capital goods imports, together indicative that domestic demand remains solid. On the other side of the ledger, export growth disappointed expectations and signalled that global demand is still far from robust. Looking ahead, it is generally expected that net trade will drag on GDP growth in 2017 as strengthening domestic demand fuels import growth while exports grow at a fairly tepid pace. It is important to note that export volumes were down 0.4% in April which is largely contributed to drops in automotive goods (-4.2%) and consumer goods (-4.4%), though capital goods volumes also contributed, down 0.3%. These decreases were partially offset by a 5.3% rise in foods/feeds volumes and a 1.4% rise in exports of industrial supplies. Despite the drop from last month, global demand is continuing to gradually recover, as exports were up 3.4% compared to last April.

Globally, the OECD further noted in their reports that the world economy is on course for a “modest pickup”, with global GDP expected to reach 3.5% this year and 3.6% in 2018. The estimate for 2017 is up from its last estimate in March of 3.3%, and would be the best performance since 2011. The OECD credited recovering trade and investment flows but warned of the rising threat of protectionism. It also cautioned that despite the brighter outlook, growth would still fall short of rates seen before the 2008-2009 financial crisis.

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 99% 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. For Q1 2017, the blended earnings growth rate for the S&P 500 is 14.0%. This growth rate marked the highest (year-over-year) earnings growth rate 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 go decrease slightly with corresponding valuations rising. Volatility remains high in these assets which should not be functioning like this. This 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 movements in the currency, to see if we should be locking in the gains and hedging the risks. 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, following Brexit, and less negative risk due to the UK economic data stabilising, and therefore uncertainty risk is dropping off. As Brexit matures, we 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 remained relatively flat against the US Dollar as we inch closer and closer towards the UK General election tomorrow. Polls continue to suggest that the Conservatives will still win Thursday’s general election, despite their lead narrowing, and so the markets “are not in panic mode”. Only time will tell what the outcome will be. With regards to the range for Sterling, it has shown some strength against the US Dollar, however this isn’t because of Sterling strengthening, but the US Dollar weakening. We believe that currency traders are nervous that the Trump administration will not be able to push through his proposed tax cuts, financial deregulation and infrastructure spending policies. He is due to speak today at 6pm regarding his infrastructure spending.

GBP / USD – Range 1.32 – 1.20 – Today at 1.29
GBP / EUR – Range 1.22 – 1.12 – Today at 1.14
GBP / JPY – Range 150 – 130 – Today at 141.40

Oil Price;

We monitor the oil price as it is a 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 has dropped further, despite the agreement between OPEC and non-OPEC nations to extend output cuts with the intension for increasing the price. WTI Crude is currently trading at $47.92 and $49.80 for Brent, down approx. 2.6% for WTI and approx. 3.7% for Brent. Oil prices have remained volatile as they jumped, then fell after a group of Arab states cut ties with Qatar, the world’s number one producer of liquefied natural gas. Saudi Arabia, the United Arab Emirates, Egypt and Bahrain closed transport links with Qatar, accusing it of supporting extremism and undermining regional stability. Qatar is still one of OPEC’s smallest oil producers but some fear tension within the cartel could weaken its recent deal to curb production, aimed at supporting prices.

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 the price of gold increase approx. $29 an ounce to $1292 a troy ounce. It is apparent that investors are turning to the safe haven asset due to the increasing political and economic uncertainty around the world. Fears are also growing about tensions in the Middle East after six Arab nations cut diplomatic ties with Qatar.

Model Portfolios & Indices

Over the last week, we have seen most of the indices that we track remain relatively flat after reaching record highs as we enter a period of political and economic uncertainty and investors are just waiting for some clarity. US indices remain relatively strong, however have dropped slightly after concerns over Trumps policies passing congress. UK indices have started to come down slightly over the past few weeks from record highs, following the uncertainty over the political position which will be facing the tough Brexit Negotiations which lay ahead.

Our model portfolios have performed well over the past few months, with some of our positions exceeding their 12 month targets within the first few months of holding them. This is due to strong economic data and the positions we had strong conviction in. It was decided that we would dial down our risky (equity) exposure when OBI Active 8 achieved 10% YTD, which it did on the 02nd of June. This triggered a sub-committee meeting and we decided to reduce our equity exposure and position our portfolios into a more defensive stance. We will maintain this defensive approach in our portfolios until we get further clarity on a few macro issues around the Trump agenda being his fiscal spending policy and the tax changes that were supposed to be significant and give rise to a surge in US spending in 2018.

The transition into these defensive portfolios are currently underway as we carry out the rebalance today. We have locked in the profits of the market rally and will re-join once data becomes strong again.

This Day in History

On this day in 1955, the 34th US President & WWII General Dwight D. Eisenhower was the first President to appear on colour TV when he appeared at his 40th class reunion at the U.S. military academy at West Point.

As always have a wonderful week and stay safe.

VBW

 

Jason