Market Commentary – 11th April 2018
Sound and Fury, what are the trade wars about?
It has been an interesting week and especially since our last publication as Trump is at it again and causing market volatility. With the US stock markets whipsawing, it is hard to predict which way shares will move next as America and China continue their war of words over trade.
Given this, Chinese President Xi Jinping gave a speech yesterday in which he calmed down the fears of a trade war with the US. However, given the mercurial nature of the US administration, the whole issue could well disappear before anything really happens (as we are used too). Many market participants may be starting to think that this is just a lot of sound and fury, signifying nothing in the end, like the outrage created over the geopolitical tensions between North Korea and the US over “Fire and Fury”. But you never know, US trade policy is in the hands of someone totally unpredictable. Recent weeks have seen a pick-up in equity market volatility among broader concern on the potential direction for global economies given the Trump administration’s clear desire to reduce the United States’ large trade deficit with China, through the imposition of tariffs. ‘Trade wars’ is probably overplaying it, but in the absence of clear policy guidance, markets will inevitably try to weigh the possible range of outcomes. Perhaps unsurprisingly, this uncertain backdrop did not provide a particularly conducive environment for equities: in sterling total return terms, the Dow, S&P and NASDAQ 100 declined 5.3%, 4.3% and 5.6% respectively in March. The countries most directly involved in the trade spat, the US and China, have seen their stock markets punished heavily.
A lot of column inches have been devoted to Trump and the scope for a potentially messy trade war with China, but we do not see this as a significant issue at the moment and the quantum of the proposed sector-specific tariffs is likely to be low (in the context of a $375bn trade deficit in goods between the US and China in 2017) and the actual measures imposed by the Trump administration will be subject to public consultation in any case. It is not hard to think that the likes of Boeing will already be unhappy about the potential impact of tariffs and will lobby hard in Washington so that their interests are protected. Therefore, in our estimation it is simply not worth getting worked up about this now, particularly when so much is still unknown. If anything, Trump’s moves probably need to be set in the context of a broader rolling back of globalisation and in our heads, this means that there could be some repatriation of production and certainly concern in relation to long or complex global supply chains. If anything, this will accelerate the move towards greater efficiency and greater automation, and a broader drive to insulate corporate supply chains from government interference.
Should we worry about the recent market weakness?
In our minds, concerns over the recent equity market weakness are overdone. The reasons we believe this is because, in the US and China, equity market weakness appears to have been driven by profit taking, this is understandable given the strength of the bull market over the past year. In terms of Q1 earnings, we think a reappraisal of some of the more bullish assumptions was probably sensible and timely and for the earnings season we think expectations are now set fair, which is supportive for equities and given that economic data is still strong, we do expect equities to continue to climb throughout 2018, with periods of volatility. Ideally, we would have liked to have seen some greater short-term volatility in some of the big names as that would have afforded the opportunity to buy more by the fund managers, however, this has been the case in the FTSE 100 which was around the 7,000 point level when we got in, which has been an opportunity following the market volatility as valuations seemed to have dropped.
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 increase, and this is mostly due to investors reacting in the short term to the issues over trade wars between the US and China. Given the Chinese President’s speech yesterday in which he calmed tensions over a political threat, Stock Markets in Japan, South Korea and Australia all closed lower as investors remain cautious over trade tensions between the US and China. The falls come despite initial modest gains following the conciliatory speech. The sharp jumps in the US stock markets have happened as the trade war fears have eased up and as President Xi Jinping promised to cut import tariffs, smoothing concerns over rising trade tensions.
With regards to our model portfolios, given their diversification mandate of OBI and the equity and non-equity split between assets, we can hedge these gains which means that we are able to benefit from the upswing, however the non-equity positions hedge these returns and protect our portfolios from an imminent market crash. One thing to point out is if we look at any volatility indicators, i.e. the VIX index (which tracks the volatility of the S&P 500) we note that despite us being in a relatively late stage of the economic cycle, our portfolios are performing well and are negating the losses we are seeing in the markets, and our strong thesis and investment selection is enabling us to employ fund mangers to point out the risks and invest into areas with strong conviction.
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.
This Day in History
On this day in 1976, Steve Wozniak released the Apple 1 which was the first Apple computer to have been built. Wozniak’s friend, Steve Jobs had the idea of selling the computer. The Apple 1 was Apple’s first product, and to finance its creation, Jobs sold his only motorized means of transportation, a VW Microbus, for a few hundred dollars, and Steve Wozniak sold his HP-65 calculator for $500; however, Wozniak said that Jobs planned to use his bicycle if necessary. It was demonstrated in July 1976 at the Homebrew Computer Club in Palo Alto, California. Today, Apple designs and makes some of the most complex Computers which are a large source of the company’s revenue.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager