Market Commentary 20th June 2018
President Trump has made it clear that he is in the good books with China and stated that “my great friendship with President Xi and our country’s relationship with China are very important to me,” but “trade between our nations has been very unfair, for a very long time and it’s no longer sustainable.” This has had its implications as China has announced that it would retaliate in kind with 25% tariffs on US agricultural, autos and seafood exports on the 06th of July. These tariffs could reduce GDP by 0.1 – 0.2% in both economies. China’s retaliative stance means that things could have got a bit personal with the US and this counter retaliation could spell some trouble. The markets capitulated and today they are calm, so we wait and see what happened next.
Are the markets a risky place now?
It is important to note that what we are currently seeing in the markets is very normal behaviour as investors go into risk on, and risk off cycles, especially at this stage of the economic cycle. By locking in profits, they are in turn causing market volatility which is exacerbating the movements we have been seeing. It is imperative to note that by not focusing on the short-term movement and focusing on the long-term movements and focusing on the long-term outlook of our OBI portfolios, we are able to achieve our projected returns. Yes, it is without a doubt that political uncertainty is making stretched market valuations more vulnerable, however it’s about trying to limit the downside when fear returns to the market and volatility rises. Markets this week have been lower after President Donald Trump’s latest threat to impose duties on additional Chinese goods heightened worries that tit-for-tat tariffs could spiral into a trade war.
From a global economic view point the data is still supportive of a balanced portfolio but the risks are growing, and we are watching constantly the data. For ow though we are still predominantly long as regards to equities but if the indices get back to levels they were at towards the end of January we may reverse the position.
One risk that sits quite high also and it may cause us to reduce our overseas exposure is currency. As always, we are not a firm that generally trades currencies but with sterling so weak there are risks that if there was an issue that caused a positive move in sterling s we are heavily overseas focused in our portfolios this would be negative, so we are also watching development of Brexit discussions carefully. The recent move in the USD is about the USD also and not Sterling. Short term we are not that concerned, but we expect by year end for sterling to be higher than it is today so as the summer draws on we will be likely to get more defensive and more positioned to defend against a strengthening sterling.
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 virtually all of the global indices that we track drop down with the fears of a trade war between China and the US. The biggest hit regions have been Chinese equities on the basis of the China tariffs, and the Chinese and Hong Kong markets are down over 5%. Most other global indices are down between 1% and 2% over the week. Our portfolios are down about a 1/3rd of the market volatility so again our balanced portfolios are still slowly moving up and getting the balance right between investing in equities to try and get growth on the portfolio and protecting capital. Over the last 6 months though the markets have not really gone anywhere, and we do feel that the markets will struggle to appreciate above levels seen at the end of January on the basis that earnings growth although positive is still expected to start growing slower than it was and that will mean forward looking price earnings will force equities to fall in value. If I am completely honest we still have a few months of growth before we must go very defensive if Trump does not create further mayhem.
Interestingly the US 10 year bond yields have not risen as much as everyone expected and we feel that for as long as the 10 year remains below 3.5% Equities globally will stull be positive. Today the US 10 year yield is at 2.90% and that is technically a long way off the high seen mid May of 3.1% when worries were growing again.
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.
Fact of the day
On this day in 1975 (gosh its been that long), the famous blockbuster film, “Jaws” was released. Twenty-nine-year-old Steven Spielberg’s second movie faced countless production problems, including budget overruns and mechanical snafus in the title character, but ‘Jaws’ makes waves at ticket counters, chewing up previous box office records, and launching the summer blockbuster era. Just comes to show, with the right product, anything can be possible.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager