Market Commentary – 31st January 2018

Onwards & Upwards

As we end January we can clearly confirm that the Festive cheer has more than adequately spilled over into the month, pushing markets to either new multidecade or all-time highs accepting that over the last week we have seen them pull back slightly as profits have been taken – making some investors nervous about bubble risks. Amongst other things, the pull back this week seems to stem from investor overreaction to US tax reform. However, what probably needs to be appreciated better is that the global earnings cycle remains in a powerful upswing, helped by a strong global industrial cycle, which in turn has been boosted by a weaker US dollar. That often repeated cliché – that bull markets don’t simply die of old age – remains apt at this stage. In fact, the length of neither the current bull market in global equities nor the expansion in the global economic cycle is unprecedented. But even if the length of an expansion should be a legitimate cause for concern, the current global recovery isn’t quite there yet. The goldilocks phase continues and we will continue to remain invested.

In Europe this goldilocks phase is feeding through to the workers (finally) with those in Europe now on course to enjoy some of the best working conditions since the inception of the euro. Over the next five years, we should see strong wage growth steadily breaking away from its dismal post-crisis average of 1.5%, more job security for those already in employment, and the job finding prospects for the unemployed will be the best since the golden year of 2008. Years of low growth and chronically high unemployment have raised concerns about secular stagnation and about the ability of policy makers to address the challenges this presents. Ten years after the financial crisis, Europe remains deeply scarred by the experience and nowhere is this more evident than in the labour market, so the data we see today gives us optimism to substantiate our overweight position in this area.

As for the UK, a stronger global economy has seen a pickup in exports supported by a continuing weak sterling. As a result, in the last week we have seen some economists increase their UK GDP growth in 2018 to 1.8% from 1.5% last month. This is further evidence that the economy is sharing in the proceeds of stronger global growth. We expect the MPC to continue the process of policy normalisation by hiking interest rates once this year, probably at the May meeting which is probably wrong and will be detrimental to the consumer, but nothing that Mr Carney talks about looks at the real economy. The preliminary estimate of quarterly GDP growth for Q4 2017 came in at 0.5%, a little above expectations with the manufacturing sector continuing to perform strongly, growing by 1.3% for a second successive quarter, but construction output fell by 1%. The dominant services sector grew by 0.6%, its strongest outturn for a year. We are still behind the rest of the world though due to Brexit fears hurting investment and productivity, and for those reasons we remain underweight UK. On Brexit, we expect the UK and EU to agree a transitional deal quickly, with the UK remaining bound by EU rules – but without a say in forming them – until the end of 2020. As far as the PM is concerned, we would be surprised if she lasted the coming months as the knives do seem to be out and there is definitely positioning by some…..

Model Portfolios

The last week has seen all of the global indices drop quite heavily and as a result, the portfolios have also dropped with the Chinese market down over 3% on the week. Our asset diversification strategy certainly works and against benchmarks we are already, after 1 month, nearly 0.9% ahead YTD which is fantastic. The markets are up today and currencies continue to fluctuate with the dollar staying weak, which is likely to continue supporting global expansion for as long as the rest of the world is now growing faster than the US. All in therefore we are happy with the models and our positions as they balance the risks on delivering the dual mandate we have of delivering outcomes and protecting capital.

Important Information

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 days 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.

Blue Moon

For the astronomers in you, we are tonight having the first Super Blue Blood Moon Lunar eclipse for 150 years – and astronomers and people like me are very excited. I also know one little boy called Andy that loves taking photographs, who will be very excited if he reads this to hear his name mentioned. Despite the name, the moon isn’t going to appear blue tonight, this is reference to the fact that we are seeing two full moons in one month, which is an not a usual occurrence.  The moon will actually have a slightly reddish tinge, because as well as being a blue moon, it will also be a “blood moon”, which is when the reflection of sunlight on the Earth’s atmosphere hits the lunar surface. A blood moon acquires a golden, copper, or even rusty-red colour depending on where the sun is – and it’s usually low in the sky or near the horizon.  Andy, good luck with your camera and make sure you take the lens cap off and do not use a flash!!!

As always have a wonderful week and stay safe.

VBW

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