Market Commentary – 13th June 2018
Trump-Kim summit fails to excite markets
It has been an interesting past few days with US President, Donald Trump meeting up with the North Korean Dictator, Kim Jong-Un. The leaders meeting in the summit in Singapore has seen good progress with Trump mentioning that a lot of progress has been made during his meeting and quoting “a lot of progress – really very positive. I think better than anybody could have expected. Top of the line, very good”. Once he passed these comments, they both went for a signing, however it was not discussed what document was to be signed and what it was entailing.
What’s all this doing for the financial markets? The eyes of the world may have been on the two leaders historic meeting, but the summit has had little impact on the markets. It seems that currency traders have brought the USD to a three-week high in the run-up to the summit, but these gains soon were lost. Markets are now focused and looking forward to today’s Federal Reserve decision on their stance on monetary policy and if they are going to increase rates, which is very likely to be hiked by 25 basis points. Tomorrow is the European Central Bank’s take on the issue and if they will be hiking too. Another risk keeping investors shy at the moment is the worries of a trade war between the US and its allies are still lingering in the background. The summit is more of a side show and headline grabber rather than yielding anything substantive with markets more worried about the developments at the G7 summit.
Where in the world?
The story of 2017 was strong and synchronised global growth, and almost all equity markets made good returns over the period. This year, however, the behaviour of economies seems to be much less uniform. In this environment we highlight our preferred regional exposures.
We are seeing a shift in global economic growth leadership towards the US, away from the synchronised scenario. With the Purchasing Managers Index (PMI), an indicator of economic health, for the US and for the world (including the US). From the beginning of this year, there has been a divergence in the data, with the global PMI falling, albeit still at very healthy levels, but the US PMI continuing to rise. US economic strength is further supported by the planned tax cuts. In this environment we would expect US equities to benefit which is something our multi asset fund managers have done to increase the OBI equity exposure. We would also expect the US dollar to benefit which has repercussions for the emerging markets that have a material amount of their debt denominated in US dollars, because the cost of their debt rises as the US dollar rises. We are comfortable with our exposure to the emerging market countries that we have in our higher risk portfolios that are less sensitive to these global factors, like China.
Is the world trade growth slow down panicking the G7?
The current sensitive atmosphere at the G7 summit comes at an unfortunate time for the world economy. The decision by the US to press ahead with metals tariffs risks an escalating series of protectionist actions just as world trade growth has started to decelerate. The summit has failed to address the rising danger of high-cost ‘tail risks’ from trade and other factors like higher oil prices. Economists world trade indicators have slipped again in May, reaching its lowest level since early 2017, and unwelcome signs of a slowdown are also visible in key freight indicators and German industrial orders data. The combined countries efforts on protectionism could deepen this slowdown.
World trade growth indicators have deteriorated over recent months, and signs of deceleration are now unambiguous. Economists world trade indicator, based on the export components of PMI-type surveys in the largest economies, fell to its lowest level in 16 months in May. As this indicator leads “hard” trade data by a few months, the latter look likely to weaken into Q3. Although these economist’s world trade indicator remains consistent with expanding trade, it now signals trade growth of around 4% year on year versus 6% in 2017. Other indicators suggest the risk of a steeper slowdown. German manufacturing orders have also worsened sharply. In April, orders dropped (on a six-month annualised basis) at the fastest pace since December 2015, when the world economy was growing much slower than now. Capital goods orders were especially weak, implying the upturn in investment in the eurozone may be ending. The trade slowdown visible in recent data is probably not directly connected to protectionist actions which to date have been limited in scale. Rising oil prices are more likely to have been a driving factor. But an escalation of recent trade tensions would exacerbate the slowdown. Overall, high-cost tail risks to world growth have risen.
The US and China have so far failed to agree a deal to de-escalate their dispute, which threatens tariffs on up to US$200 billion of bilateral trade. China-US trade remains most at risk of severe measures due to China’s dominant role in US trade deficits in sectors like electronics and machinery. But disputes with Canada, Mexico and the EU also have the potential to worsen. All have already announced retaliatory actions against US metals tariffs. Meanwhile the US is again talking about ending Nafta and is threatening automobile and auto parts tariffs, with the EU the main target given it is a large contributor to the US vehicle deficit. Such actions would have large and widespread negative spillovers, either through supply chain effects or if the dumping of products outside the US led to counter-measures by third countries.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document, which focuses on the economic data in more detail.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track increased with the US leading the gains made across all other major indices, especially in Asia following the Trump-Kim summit. However, the gains made are very limited due to a lack of detail. Indeed, Trump and Kim singed a “comprehensive” document, the content of which are still unknown have not spooked the markets as much. If we had more detail, the gains made could have been more as investors are still pricing in the risks. This has been a bit of a boost to sentiment, however, all eyes are on the Fed this afternoon at 7pm GMT on raising the interest rates.
With our model portfolios, OBI is doing what it needs to be doing and increasing returns based on the equity, non-equity split as well as pencilling in for the risks priced into the markets. As the returns are increasing, we are locking in gains by rotating the assets we hold to ensure that the risks don’t erode the gains when fears of an imminent market correction is around the corner. In order to consistently deliver on our outcomes, we have to be pragmatic and change our positions when the data changes and given where global equity markets are. Our sectoral asset allocation is broadly unchanged, as the absolute level of global PMIs remains high and in this risk on environment we still expect risk assets, specifically cyclical equities, to outperform which is substantiated in the below Dataset.
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
With the theme of North Korea, on this day in 2000, President Kim Dae Jung of South Korea meets Kim Jong-Il, the leader of North Korea for the beginning of the first ever inter-Korea summit, in the northern capital of Pyongyang. 18 years later, the US president and the North Korean dictator have met on a more peaceful note. This marks a milestone with the issues that have been priced into the political and financial markets.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager