Market Commentary – 06th of June 2018
World Bank says advanced economies will ‘lead slowdown’
Each year the World Bank takes stock of the world economy and it’s just released its latest report. In 2016 a rising tide of investment and trade and confidence, which has lifted growth in all countries, but now we see that tide turning so in 2018 we still expect growth of 3.1%, but then economists expect it to gradually slow and the slowdown will be led by advanced economies where the monetary policy support is going to be very gradually withdrawn. In all likelihood, that process of normalisation of monetary policy in advanced countries is going to proceed very smoothly.
In the report, under the global growth section, they have highlighted that global growth has eased but remains robust and is projected to reach the much anticipated 3.1% in 2018. It is expected to edge down over the next two years as global slack dissipates, trade and investment moderate, and financing conditions tighten. Growth in advanced economies is forecast to decelerate toward potential rates as monetary policy is normalised and the effects of U.S. fiscal stimulus starts to slow down. In emerging market and developing economies (EMDEs), growth in commodity importers will remain strong, while the rebound in commodity exporters is projected to mature over the next two years. For the first time since 2010, the long-term (10-year-ahead) consensus forecast for global growth appears to have stabilised. Although this development could signal that the effects of the global financial crisis are fading, past experience cautions that long-term forecasts are often overly optimistic. While well below levels expected a decade ago, these forecasts also remain above potential growth estimates. Risks to the outlook are tilted to the downside. They have included in the report disorderly financial market movements, escalating trade protectionism, and heightened geopolitical tensions. EMDE policymakers should rebuild monetary and fiscal policy buffers and be prepared for rising global interest rates and possible episodes of financial market turbulence. In the longer run, adverse structural forces continue to overshadow long-term growth prospects implying that EMDEs need to boost potential growth by promoting competitiveness, adaptability to technological change, and trade openness. These steps will help mitigate an expected growth slowdown over the next decade, especially if long-term growth forecasts fall (once again) short of expectations.
In the report they have stressed that a cyclical recovery is underway in most EMDE regions that host a substantial number of commodity exporters. Over the next two years, the upturn in these regions is expected to mature, as commodity prices flatten. Robust economic activity in EMDE regions with large numbers of commodity importers is forecast to continue. However, risks to the growth outlook continue to tilt to the downside in many regions.
The Economic Prospects includes sections on the role of the largest emerging markets in global commodity markets and on the implications of high corporate debt for financial stability and investment. Rapid growth among the major emerging markets over the past 20 years has boosted global demand for commodities. The seven largest emerging markets (EM7) accounted for almost all the increase in global consumption of metals and two-thirds of the increase in energy consumption over this period. As these economies mature and shift towards less commodity-intensive activities, their demand for most commodities may level off. While global energy consumption growth may remain broadly steady, global metals and foods demand growth could slow by one-third over the next decade. This would dampen global commodity prices. For emerging market and developing economies that depend on raw materials for government and export revenues, these prospects reinforce the need for economic diversification and the strengthening of policy frameworks. With regards to the corporate debt issues, average corporate debt in emerging market and developing economies has increased over the past decade, raising concerns about their financial stability and growth prospects. Debt service costs of EMDE firms are expected to rise as advanced economies normalize monetary policy, and debt is increasingly held by firms with riskier balance sheets. Elevated debt may be associated with weak investment growth, especially in large firms. Countercyclical and macroprudential policies can address financial stability concerns that are raised by these trends. Structural policies, including the strengthening of bankruptcy regimes, are appropriate tools to address the investment implications of sizeable corporate debt.
Is Italy still a risk?
There is a bit of risk priced into the markets with the nervousness from investors over Italy’s spending plans. The spending plans of the new Italian government have continued to rattle the financial markets. The cost of borrowing for Italy has risen for the second day in a row. The yield on 2-year government bonds has risen to 1.2951%. Last week yields soared to 2.724% on fears that Italy might put in place a Eurosceptic government. Now the markets are focused on the new government’s spending plans. Italy already has a big debt burden and adding to that will raise concerns over Italy’s financial position. On Tuesday Prime Minister Giuseppe Conte addressed the Senate and said he would tackle social hardship through a universal income.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Assets moving across to Fusion SEI from Pershing
On Friday, the 8th of June, we have arranged for a bulk asset transfer for all clients currently on Pershing as their custodian of assets and transferring the lines of stock to Fusion SEI. What this means is that from your perspective, your assets should not get affected due to the way we are transferring the assets in specie, as the line of stock will just be transfered across.
We have a process in place and our team will monitor the asset move throughout the transition and ensure that there are no complications. The bulk asset transfer should complete by early next week and we will confirm once this has been actioned.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track have increased, with most of the gains being made in the US, which in turn is leading the growth in Asia and the rest of the world. Most of the gains have been made in the NASDAQ, which has grown 3.75% over the past week as investors have been encouraged by US economic data. This has meant that Asian markets have followed the rally too. The UK markets have been benefitting from resilient economic data, which was released at the start of the month, which all point to a growing economy, despite Brexit pressures. With Emerging Markets (EM), India has raised interest rates today for the first time in 4 years and generally EM we are seeing central bankers raising interest rates based on rising oil prices which have created uncertainty on the inflation front. The only index down over the past week has been the Australian ASX 200, however this will now close on par today based on the Australian economic GDP data which has beaten expectations, as global demand for the country’s resources has boosted exports, as well as hike in government spending and infrastructure.
With our model portfolios, these have increased over the past week based on the equity markets reaching higher. Based on the research we have conducted and following on from the investment committee meeting we had in early May, we are content with the equity markets and have the equity and non-equity split based on model portfolio theory at a reasonable level where we are protecting the models from an imminent correction, as well as benefitting from the expensive equity markets. We will maintain this view until the economic data is strong and consistent. We are constantly reviewing the economic and political risks and will turn defensive when required. From the research we conduct and the economists we speak to, we are happy that 2018 will continue to remain strong, with some minor corrections from time to time based on various political risks.
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 1933, the first ever drive-in cinema was established. Richard Hollingshead opens his “automobile movie theatre” in Camden County, New Jersey, featuring 400 car slots, a 40-x-50-foot screen, and three 6-foot speakers. The feature at the first US drive-in theater is ‘Wives Beware,’ with admission costing a quarter per car and customer.
A drive-in theater or drive-in cinema is a form of cinema structure consisting of a large outdoor movie screen, a projection booth, a concession stands and a large parking area for automobiles. Within this enclosed area, customers can view movies from the privacy and comfort of their cars. Some drive-ins have small playgrounds for children and a few picnic tables
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager