Market Commentary – 17th January 2018
Another wonderful week?
2017 was a very strong year for equities and returns on risky assets were rewarding, with a few minor speedbumps, such as the geopolitical tensions between North Korea and the US, fears of Trumps administration etc. Not only was global growth underestimated by the consensus, but underlying inflation pressures were overestimated. Together they delivered better-than-expected corporate earnings growth while ensuring that the withdrawal of monetary policy accommodation remained gradual, anchoring long-term interest rates at low levels. Will 2018 deliver more of the same?
We have been having yet another strong week in the markets since our last writing with markets continuing to reach record highs in the US, which is driving global economic growth. With the growth surge in the developed markets, we expect this to replicate and feed itself into the Emerging Markets and economists are expecting EM growth to rise from 4.4% in 2017 to 4.7% in 2018 on the back of the pick-up in global trade, commodity prices and supportive domestic conditions. The EM-DM growth differential will be the widest its ever been since the financial crisis in 2007/8.
Investment in 2018 is expected to grow at the fastest rate since 2014, and we see the risks tilted towards the upside, despite a slowdown in China. We continue to remain happy with the economic data out of Europe and expect the bloc to grow even further throughout 2018, despite only gradual policy tightening there and in the UK.
Given where we are positioned in the current economic cycle, we do expect a slowdown in equities at an imminent stage and we are mindful of the relatively advanced nature of the financial cycle in developed markets. Further rises in oil prices are an emerging risk and we are cautious of our exposure and have raised this with the fund managers to see what they think about this; however, this shouldn’t be considered a major risk and is very unlikely to trigger a major slowdown. We still see the risks priced into the markets as broadly balanced.
US markets were down on Monday and made further gains on Tuesday. With the risks 2018 has inherited, such as the geopolitical tensions between North Korea and the US and the US fiscal policy, reforms remain a key downside risk in the initial stages of 2018. On the contrary, fears have been rising over EU populism and separatisms, which economists fear could potentially knock off 0.5 percentage points off growth.
There is certainly little evidence that the current growth momentum is moderating. The global industrial complex is enjoying its best period of sustained growth since 2011, with global trade activity enjoying a similar renaissance and the global composite PMI reaching multi-year highs. Many economists are suggesting that 2017 was the final year of the recovery of the 2007/8 recession.
The term commonly used in economics, ‘animal spirits’ is coming into play very well here, in which people are following the herd and investing in equities as they reach new record highs. We are seeing a few days where investors are selling off their risk as the fears of a downturn are imminent. The animal spirits we are commonly seeing could lead to a more virtuous near-term economic and earnings cycle, presenting further upside risks to near-term growth projections, and there is at least some risk that they could give way to a boom.
Indeed, there are plentiful signs that the scars from the financial crisis are fading and that growth is becoming more self-sustaining. Economists commonly use an index of US financial stress, and this shows that the risks remain low despite the Fed being expected to deliver three rate hikes this year. Bank lending standards are easing across a range of economies as regulatory constraints become less onerous. Growth in capital spending is improving, lifting productivity growth off the floor. And consumer confidence is riding high, with recent widespread drops in saving rates implying that households are feeling more confident about the future. It is without a doubt that we are in a good phase of the global economic cycle and we will remain within our view of ‘normalisation’ across our portfolios to benefit from the equity rally currently present in the markets.
For anyone who wants further data to substantiate the position, please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track improve, with the current equity rally as explained above. The US markets are leading most of the global gains and we saw the US indices gain solid ground on Tuesday after the markets were closed on Monday, due to Martin Luther King Day and traders played catch-up yesterday till noon, but slowed down due to the fears over the US government shutdown on Friday. Our ethos is that we don’t day trade our portfolios, however, we like to comment on them to make our clients and ourselves aware of any risks that are currently present in the markets and could change our asset allocation. In the previous investment committee meeting, we are happy with the current asset allocation and will remain with our ‘normalised’ approach until the economic data points in a different direction, which further justifies why the YTD performance across all our portfolios is strong and in line with the benchmark.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1929, Popeye made his first appearance in a comic strip called ‘Thimble Theatre’. Popeye the Sailor was created by Elzie Crisler Segar. The character first appeared in the daily King Features comic strip, and Popeye became the strip’s title in later years; Popeye has also appeared in theatrical and television animated cartoons.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager