OCM Commentaries

Market Commentary – 30th May 2018

By June 4, 2018 October 8th, 2019 No Comments

Italian political crisis hits global stock markets, not a cause of concern… Yet


We don’t really like to dwell too much on global economic politics because this normally just causes problems and issues in the short term and causes confusion in the markets that are short lived. We like to focus on the core fundamentals as well as the economics, which is what professional investors look at, and is why we are ignoring what is happening with the Italian government, for now, because it is just political noise. It has caused a stir though and the markets globally reacted negatively yesterday, but calm has returned. Fears over Italy’s political upheaval spread to wall street after Europe’s financial markets closed lower yesterday. The prospects of a fresh election and the possibility of Eurosceptic parties strengthening their position has raised concerns about the eurozone’s stability, however it is important to note that the markets have bounced back up today, and we are back to normal. This is very normal market behaviour after a correction and also given where we are in the economic curve. When the US markets closed yesterday, the S&P 500 and the Dow Jones suffered their biggest one-day percentage drop in a month. Bank shares were hit hard on worries about their exposure to Italy. Having said all this, all the nervousness in the markets is based on where the stock markets are in valuation terms. Trump is as always doing everything he can to aggravate the markets.


Politics is a key factor when it comes to shaping the global economic performance and short-term changes to the markets. Markets were calm at the close of last week and if you look at the money flow index, investors were flooding cash into the current bull market and benefiting from high valuations, and then yesterday they were doing the opposite which is very perplexing. This is though very normal market behaviour because professional investors are not causing the volatility in the markets, but retail and short-term investors.


What’s been going on in Italy?


Italians were getting ready for new elections in the next few months as Professor Cottarelli, the technocrat economist nominated by the President on Monday to try to form a government, was unlikely to pass a confidence vote in the Parliament. But last night, the leaders of the Five Star and the Lega said that their deal to form a government could be put back on the table. This came after shocking surges in Italy’s government bond yields and possibly some politicians are now thinking that snap elections will undermine their positions. We will know more over the next few hours as the day progresses. Lega’s leader, Matteo Salvini, stated in an electoral rally this morning that the President should pave way for early elections. But it is believed that to calm financial markets, politicians would not only have to give the country a functioning government, they will also have to clarify their position regarding the Euro-zone and commit to Italy remaining in the Eurozone. In this respect the President made clear that Italy will not leave the euro, at least not under the current Parliament, as the political campaign on this issue did not enter in the electoral agenda and some parties maintained an ambiguous position. Without more clarity, bond markets will remain fearful.


This morning when European markets opened, Italy’s main share index (MIB) rebounded following from yesterdays sharp declines. This is mostly due to investors buying back in and the Italian government calming the markets back down. Italy’s president Sergio Mattarella is reportedly meeting with prime minister designate Carlo Cottarelli today as he attempts to put together a stop gap government. Italy’s anti-establishment parties Five Star and the League are again attempting to form a government. The auction seen today of Italian government debt has helped investors concerns about the country and has also lifted the Euro in todays trading. This does show that investors do have some faith in the Italian government… for now. However, one thing to be learnt from this episode is that we cannot ignore Italy, and market makers are watching them closely. The ECBs intervention is unlikely and Italian assets will remain under pressure. The bond auction has been a success this morning and Italy is not going to abandon the euro as its currency.


With our economic and investment thesis, we are still holding onto our current positions given that the markets are still expected to keep surprising the upside because economic data is still strong. Following on from the investment committee meeting we held this month, when we conducted a top down analysis on the world and on the markets, we don’t see any cause of concern. We expect the markets to continue to be strong and keep surprising the upside, hence the decision to hold all our positions.


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 falling significantly following the political fears in Italy. Asia has closed in the negative, however as investor sentiment is strong, we could see positive returns intraday in the stock markets when the US opens later this afternoon. Despite the sharp drops in the markets this week, the model portfolios have been relatively stable due to our diversification techniques. By adapting our Outcome Based Investing (OBI) techniques, we can hold equity, as well as non-equity assets which will hedge the model portfolios in times of a correction, such as the ones we saw yesterday and early February. By holding assets in this way, we can rotate our assets based on the economic cycle. We will continue to monitor the financial markets and we will make necessary adjustments as the investment committee sees fit. We are expecting more value in the markets from our current positions and intend to dial down the assets later in the year when the risks are higher. Since our mid-April Market Commentary, we highlighted how Sterling’s appreciation had an impact on the model portfolios and now sterling has been dropping since, we can note how it’s been having an impact on our model portfolios as they are based in GBP terms.


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.


Story of the Week


This is the true story of George Phillips of Meridian, Mississippi, who was going to bed when his wife told him that he’d left the light on in the shed. George opened the door to go turn off the light but saw there were people in the shed in the process of stealing things. He immediately phoned the police, who asked, “Is someone in your house?” and George said, “No,” and explained the situation. Then they explained that all patrols were busy, and that he should simply lock his door and an officer would be there when available. George said, “Okay,” hung up, counted to 30, and phoned the police again. “Hello, I just called you a few seconds ago because there were people in my shed. Well, you don’t have to worry about them now because I’ve just shot them all.” Then he hung up. Within five minutes three squad cars, an Armed Response unit, and an ambulance showed up. Of course, the police caught the burglars red-handed.


One of the policemen said to George, “I thought you said that you’d shot them!” George said, “I thought you said there was nobody available!”


As always have a wonderful week and stay safe.




Jason Stather-Lodge  CFP, MCSI, APFS

CEO & Founder

Chartered & Certified Financial Planner

Chartered Wealth Manager