OCM Commentaries

Market Commentary – 27th June 2018

By June 27, 2018 October 8th, 2019 No Comments

Good Outlook for 2018…


Despite some weakness in the first quarter, and concerns about protectionism, global economic growth is likely to hold up well this year. In advanced economies, the outlook for investment and household consumption is bright. Tightening labour markets are putting some upward pressure on wages, but central bankers will be in no hurry to tighten policy. In contrast, we expect rising price pressures to prompt the Fed to raise rates five more times by mid-2019, which will contribute to a sharp slowdown there next year. With China also losing momentum, global economic growth is set to slow in 2019 and 2020.


We still expect the fiscal stimulus and weaker dollar to boost the US economy this year. Financial market volatility and the threat of a trade war may weigh on business sentiment but should have little impact on activity. Rising employment will probably put further upward pressure on wage inflation and persuade the Fed to hike rates a further three times this year and twice more in 2019. Over the course of next year, however, economists expect the economy to slow as the effects of the fiscal stimulus fade, tighter monetary policy begins to bite, and jobs growth slows. This in turn will cause the Fed to begin cutting interest rates in 2020.


Should we worry about trade wars?


Whenever I am on holiday, the markets always drop, and whilst I sit in Rome enjoying my 20th wedding anniversary, I look at the markets and realise that what we do is focus on the fundamentals and not trade the current noise seen in the markets.


It is difficult to exactly underpin the issues with the “trade war” headlines, but the potential significant protectionism between the world’s two largest economies should not be ignored. So, what do we know? So far, the 25% tariff on US$50bn of imports from China announced by the US, followed by retaliation from China, could be best described as a trade battle, rather than anything more significant. However, there have been threats of quite a lot more from the US, and key to understanding the impact on markets and economies is the degree to which it could escalate into something more material. Trump, and his administration are the major troublemakers in this sensitive scenario.


We need to remember at this stage that the economics and the core fundamental data is still very strong and resilient, with the US roaring away. If we were living in a world with no political risks, the markets would be edging higher and higher based on strong economic news. The US economy is performing better than its peers, likewise for the US stock markets, which in turn is leading the rest of the global stock markets, despite the recent volatility. Much of the recent growth in the US is a result of delivering tax reform but, for the short term at least, politically and economically, raising the pressure around tariffs at a time when the impact of fiscal stimulus on the US economy is growing might be quite discerning, or just a coincidence. Yes, we should be wary of the trade wars, however we should be realistic on how they will be priced into the markets fully and focus on the economics rather than the noise.


Trumponomics… Noise?


One key event pencilled in 2018 is Trumps mid-term elections and Trump will be focused on avoiding significant market falls or dampening business confidence in the run up and it is unlikely that Trump would want to face down the market. We see this period being relatively strong and expect the stock markets to start improving, from a political side, based on the resilience on the economic side.


We could see a noisy few months, during which time the focus will remain on the impact of announcements, as well as actual implemented measures, on sentiment and activity. Conventional wisdom suggests that a fully-fledged trade war would add to inflation and subtract from growth. At this stage though, the risk seems to be one of ‘increased tail risks’, rather than having a material impact on growth/inflation forecasts.


It is therefore fair to suggest that we should not be fearful of the current market volatility priced into the markets with various political risks but should remind ourselves that the economics and its fundamentals are strong and from an investment perspective, economic data is a greater factor than Trumps market nerves, so we remain invested and do not trade the noise. We will continue to watch the markets closely and assess the economic data because it is expected that there could be a global slowdown in the next 12 to 18 months, however until then we remain fully invested.


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 due to the Trump administration triggering the trade wars, which has left investors sentiment lower, as investors are selling off returns to bag in profits from the recent highs in valuations. Investors are still finding it difficult to trade actively, with concerns lingering over trade friction around the US and a lack of fresh market-moving information. The fears have replicated itself from the US to the rest of the world and has brought down the major indices, exacerbating the drop in Asian equities, which is usually what we see. In China there’s an economy that was already showing signs of slowing down, and the market is already starting to price in the fact that the US economy may, in the next 12 to 18 months, reach a peak, so with the topics now around a trade war, people have started to worry about the drag that could have on economic growth.


With the model portfolios, having a strong asset allocation has negated the drops in the portfolios with the split in equity and non-equity assets. Also, with the fund managers we employ in the model portfolios, their mandates are centred around strong conviction in their asset selection. We expect the markets to remain in cautious territory throughout 2018 with high volatility based on various political risks, however the economic fundamentals will pick up these valuations and improve investors sentiment giving them a reason to remain invested and therefore not trading the noise in the markets.



Important Information


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 1985, the American legendary ‘Mother Road’ is no more. It’s too late to get hip to timely Route 66 tips, as the once heavily travelled highway spanning the US heartland from Chicago to L.A. (California) is officially decertified. Formerly stretching more than 2,000 miles, the giant US interstate highway system now renders the route obsolete.


As always have a wonderful week and stay safe.






Jason Stather-Lodge  CFP, MCSI, APFS

CEO & Founder

Chartered & Certified Financial Planner

Chartered Wealth Manager