Please find below our Market Update for the week ending 28th September 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Having not spoken about Brexit last week, we thought we couldn’t ignore it for too long with everything going on. The most recent survey of investment banks gave the probability of a ‘no deal’ at between 15/20% and we think those forecasts are sensible. However, with history as our guide, the European Union does make deals, albeit often at the last minute. We have seen instances (Greece, Portugal and Cyprus) where there has been discord and, every time, an agreement was reached.
The most likely outcome of a no deal would be to see Sterling weaken, which could then boost the FTSE 100 and be good for UK investors because of where these companies make their profits.
Despite Brexit uncertainty, there are still many positives; the UK being ranked as one of the easiest countries to do business with (7th from 190th… much better than our football team) and an unemployment rate of just 4%. Colleagues from Blue Sky this week attended a Bank of England seminar and, whilst it is their job to build confidence and sustainability, the message on our economy was quite positive. They see steady but positive growth for the next three years with consistently low interest rates. Beyond that, and most importantly, they feel there are strategies to deal with any outcome.
In the US, markets remain close to record levels but, once again, we still like the economic prospects here, at least for a while longer. Trade talks rumble on with China continuing to get the brunt, though they are fighting back. President Trump is, at heart, a deal maker and we still think this will end relatively soon, especially with mid-term elections now around the corner.
In Europe, the Purchasing Managers’ Index, a sign of business confidence, fell very slightly across the Continent but even so remained at a level normally associated with growth. This was endorsed by Mario Draghi at the European Central bank and, as such, we still feel Europe is a good investment option for us.
In Japan, we commented last time that the economy and companies were growing nicely and the last week has seen consistent stock market gains. Part of what is driving profits is the cost of labour, which has been falling consistently for well over 20 years. In turn, the extra profits are allowing companies to invest for the future and increase dividends, which is a powerful mix for shareholders.
The Chinese stock market remains in a holding position due to the trade talks and is definitely coming off second best versus the United States. Even though the country has enviable growth prospects, already the Government has a bold agenda of reforms for interest rate and monetary policy, leading some commentators to think growth next year could be nearer 7%. It is also interesting to see China very actively seeking trade deals around the world, with Africa being a big focus. Hopefully, Theresa May is looking and learning!
Blue Sky’s market comments in conjunction with our investment partners
Blue Sky had the chance to catch up personally with Sanjay form LGT Vestra and Justin from 7IM so this week we have selected some of the key highlights for you.
Sanjay explained that, whilst they keep a close eye on politics, it is actually the economics they spend most time on and is the priority when making investment decisions. He went on to talk about some specifics, and related to production and manufacturing, saying it is far more relevant to see how many new trucks are sold than what most politicians say! With this in mind, Vestra remain keen on the UK and believe the market is much cheaper, in places, than it should be. A further positive factor here is that the last couple of years have seen a reduction in the funds overseas investors have in the UK, but that any form of Brexit resolution, which gives some certainty, is highly likely to see funds returning.
Sanjay also explained Emerging Markets had suffered a perfect storm of bad news this year but, with all of this priced in, the time to move more monies into this domain was nearing. Vestra just want to see some signs of a more stable dollar.
Justin Urquhart-Stewart is, like many, frustrated with Brexit but reminded us that 85% of the trade issues had apparently been agreed with the EU already, so there is still time for a deal to be had. He was also bullish about the UK for a number of reasons-
- We remain the 5th largest world economy
- The 8th largest manufacturer
- The 12th largest exporter.
Looking at grass roots growth, Brits are currently setting up more new businesses per head than either France or Germany.
We reflected on the litany of bad headlines across news channels. Justin commented that a headline of ‘World growth is going to be well over 3%’ was his summary right now. If there is any upside to the trade wars, it is that history shows us, when there are such dynamics, countries invariably find new opportunities and different markets to work with.
On Donald Trump, Justin was conscious of the controversies but felt he had shaken up complacency in the US like no president before, and that in many businesses this was just what was needed. We are seeing some of the benefit of this in record stock market levels and company profits.
Finally, he reminded us that 7IM were constantly looking for what he called predictable returns, which in volatile markets were always to be welcomed.
Sources: LGT Vestra and 7IM