Market Commentary – 18th April 2018
The International Monetary Fund (IMF) report
Given where we are in the global economic cycle, it is without a doubt that investors are cautious of the risks as we might be heading closer and closer to a market correction. The fundamentals would however suggest that global economic data is strong and continues to surprise investors, which gives us more room to be invested.
The IMF releases its assessment of the World Economic outlook yesterday. In this report they are still positive on the overall global economic health and have calmed investors to believe that there is no need to be worried yet. Throughout 2017, we saw subdued volatility which drove stock markets to record highs, and it was expected that this would slowdown in 2018.
In the IMF’s report, they forecast that 2018 will be the strongest year for global growth since 2011. In its new assessment of the World Economic Outlook, the IMF predicts growth this year and next of 3.9%, up from a previous projection of 3.7%. However, it warned that performance could be curtailed by trade barriers. For the UK, the IMF has made a modest upgrade for growth this year to 1.6% from 1.5%. For next year, the forecast has been slightly reduced.
Global Liquidity is tighter, however there is no signs of a crunch…
Dollar funding costs have risen in recent months, but fears of a global liquidity crunch look wide of the mark. The rise in US interbank spreads has not been mirrored elsewhere, the associated interest rate shock looks much lower than in 2008 and other measures of dollar liquidity are not alarming. While credit expansion has slowed, our preferred money and credit measures remain consistent with decent global growth, though QE unwinding is a potential risk.
The spread between US dollar LIBOR and OIS rates has widened notably over the last year, raising dollar funding costs over and above the impact of the Fed’s rising rates. But the widening is partly due to technical factors and has not been replicated in other major economies. We see no sign of global stress in bank funding markets. We estimate that the rise in LIBOR will raise dollar debt servicing costs by around 0.6% of world GDP. Such a rise is not catastrophic; it is like the increase in late 2004 and much less than that in 2008, with two-thirds of the impact to be in the US. Other dollar liquidity measures look relatively benign. The cross-currency dollar basis has been narrowing recently, and global capital flows are not collapsing. Economist’s measures show that while flows into emerging markets have slowed, the picture looks much better than in 2015 or late 2016. Measures of global credit expansion are mixed. Economists credit impulse measure shows a shift into negative territory in 2018, but this tends to lag their indicator based on central banks’ surveys of bank credit standards, which still suggests looser credit. Money supply growth has slowed from its recent peaks yet remains consistent with a solid pace of global GDP growth. One risk factor is the unwinding of global QE and the economists’ forecast G4 central banks’ net QE to become negative in late 2019.
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 as well as show high volatility, jumping up and down as investors lock in profits or are cautious of the economic cycle. In the attached Global Economic News document, we see the Money Flow Index (MFI) which shows that investors are now jumping into the markets, and this is true for the US, UK and European equities.
Based on Modern Portfolio Theory (MPT) and portfolio diversification, our portfolios are aimed at the top performing sectors in both the equity a non-equity universe. Based on the principles of Outcome Based Investing (OBI), we cyclically rotate the asset classes and by doing so, we are constantly reviewing the areas we should be invested. Since the last April 4th rebalance, we have dialled up the equity content of the portfolios which is currently benefitting them in this economic climate. The portfolios are up, and they are correlated to sterling as the funds are denominated in Sterling. We expect sterling to fall now given that its reached record highs since the 2016 Brexit Referendum. That’s been true today as Sterling fell on comments of Teresa May on a softer Brexit approach and disappointing figures from the Office of National Statistics (ONS) showing that core inflation has fallen. As sterling continues to fall till the deadline of Brexit in March 2019, we anticipate that the portfolios will benefit.
We are expecting more value in the markets from our current positions and intend to dial down the assets later in the year when the risk is higher and Central Bankers start hiking interest rates.
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 1949, the Republic of Ireland officially sheds its ties to the UK. The Republic of Ireland Act 1948 (No. 22 of 1948) is an Act of the Oireachtas which declared that Ireland may be officially described as the Republic of Ireland, and vested in the President of Ireland the power to exercise the executive authority of the state in its external relations, on the advice of the Government of Ireland.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager