Market Commentary – 5th Sept 2018
Why have the markets been volatile this week?
I think the main theme to focus on this week’s commentary is to report that the global economy is doing just fine, despite the jitters on the political and economic face, which is very normal, and to a certain extent, healthy! As we have started a new month, we have been receiving global economic data for the month of August and the Purchaser Manager Index (PMI) data, which is a key indicator on reporting on the overall health of a specific sector, is still strong. Yes, some data may have fallen from pervious highs, however they are all reporting growth, and as an optimist, that’s a great thing! Yes, we are nearing the end of the party, however the party is still on! We will remain invested and will keep an eye out on the end of the cycle which isn’t anticipated to be in 2018.
One key theme we would like to report on this week’s market commentary is surrounding emerging markets and the fact of the matter that Argentina and Turkey are heading towards an economic crisis. The International Monetary Fund (IMF) is expected to rush through a bailout of Argentina sometime this week of $50bn. We are currently seeing quite an interesting divergence in the markets, where we’ve had record highs and a long bull market for the US, whereas in the emerging markets, we are now seen to be in the bear market territory. The bull market again continues to spook investors and investors sentiment when it comes to market positioning and timing. We came out of EM investments entirely in our last rebalance based on the risks being high with oil prices, the trade wars and the fact that the US Dollar continued to strengthen. Many EM markets hold large volumes of debt in US denominated assets and with the strength of the US Dollar rising, the debt levels are becoming harder for EM markets balance sheets to pay off. Turkey and Argentina are also another reason why investors are exiting this space as their currencies fall.
There are indications that the global economic outlook is slowing when compared to this time last year, Fed reserve policy makers are concerned about the prolonged trade tensions. Powell suggested that these concerns could weaken the US economic outlook, this has therefore represented a risk for the Dollar for the rest of the year until we see the Fed increase the interest rate. Following from last week’s GDP growth data, the US does continue to look strong and we can maintain this view that this year, at least, we are still happy with the macro climate and will probably start to reduce our equity exposure towards the end of the year.
Are global central bankers rising interest rates too quick?
When we look globally, we first look at the US and how they are performing. As the US economy continues to roar away and fires on all cylinders, the global economy is argued to be in rude health backed up by solid growth figures and resilient core fundamentals. This probably explains why the economy is unphased by various global issues, rate hikes, tariffs, Turkey, you name it and the economy remains higher and higher each week and the economy had a surprising growth of 4.2% annual rate in the second quarter and looks set for a similar pace in Q3. This could mean that the economy should continue to feed its growth to the rest of the world, even though it may appear that the rest of the world is more cautious and struggling.
Strong economic data and strong consumer confidence in the US has led to high spending, which means that these are signs of the economy heating up. We are at a juncture where inflation needs to be normalised with central bankers setting their expectations for normalising monetary and fiscal policy which are demand side policies to ensure that the global economy stays in equilibrium, on the overheating side of the equation. Usually, central bankers like to follow a same trajectory by rising and cutting interest rates, but this cycle is very different as the US, Europe and the UK are all in different positions in the cycle and the central bankers all seem to be dealing with separate issues. The Bank of England is very keen to follow the lead of the Federal Reserve and may have to do that to keep sterling strong, and that is a very big problem, as we may not be ready for higher interest rates without even knowing what Brexit means.
Market makers and critiques of the current economics suggest that the raising of global interest rates by the Fed has caused mayhem round the world, in emerging markets, such as Argentina and Turkey, and we know these crises move from the periphery to the core, that’s what happened in the past, and if the Bank of England follows in the path of the Fed then I think it will be really worrying because of the level of total global debt.
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 fall. The only index in the positive territory is the technology heavily focused NASDAQ which is up slightly on the week. The US has been relatively flat compared to the European And Emerging markets, however most of the losses have been due to the US-China trade wars and the fall in Emerging Markets. Asian stocks fall on weak China services as Chinese stocks fell sharply when their markets closed this morning after a survey showed growth in China’s services sector weakened while investors remained nervous about escalating trade tensions with the US. We will continue to see the markets relatively volatile as we gain further clarity on various economic problems, such as those phasing the emerging markets, US-China trade wars and the stance central bankers will take in normalising interest rates to accommodate for global inflation.
The model portfolios have held up well against the fall in markets over the past week based on the equity and non-equity split. The non-equity element of the portfolios acts as a hedge to the equity side which means that they are correlated to the financial markets, however marginally. We will continue to asses the markets and highlight key risks and rotate the model portfolios to negate the losses and remain focused on the upside and when required, adopt a capital preservation mandate by shifting the house investment view from normal to defensive as we get through the next downturn.
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 1991, Nelson Mandela was chosen as president of the African National Congress. Often referred to as the father of the nation by South Africans, Nelson Mandela was an anti- apartheid activist and politician who served 27 years in prison. After being freed in 1990 he became the President of the African National Congress (1991-97) before being elected the first black President of his country in a fully multiracial election in 1994. For his activism, he received over 250 honours, including the 1993 Nobel Peace Prize, the US Presidential Medal of Freedom and the Soviet Order of Lenin.
As always have a wonderful week and stay safe.