Please find below our Weekly Market Update for the week ending 29th June 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
The seemingly endless ongoing trade dispute between the US and China entered a new chapter this week as Donald Trump called for a plan to restrict Chinese investment into US companies, before backtracking and dropping these plans just three days later. To recap, the US has already placed tariffs on the imports of Chinese goods of up to $50bn, with threats of that price level increasing to $200bn if the Chinese government decides to retaliate. It was reported that Trump reneged on the plan to restrict Chinese investment after a meeting with pro-business advisers within his own administration, who warned it would damage the economy by chasing away foreign businesses. Trump’s apparent impulsivity has unsurprisingly led to increased volatility in financial markets as the trade dispute continues to deteriorate, causing investors to sell-off equities in masses. The S&P 500, Nasdaq Composite and Shanghai Stock Exchange have all lost over 3% of their value since Friday 22nd June, with technology stocks bearing the brunt of the sell-off. The tech-heavy Nasdaq index fell 2.1% within one session, its biggest one-day fall for almost 4 months.
While the US’s foreign situation is volatile to say the least, their domestic economy continues to grow, which is evident from the dollar continuing to strengthen and break records. The dollar index grew by 0.92% in the last seven days, meaning it has now jumped 6.42% since mid-April to reach its highest point for almost 12 months. In regard to the opponent, China, ING Economist Iris Pang said, “China is intentionally depreciating its currency, so it can cushion part of the negative impact on exporters”, although she continued by saying “it is clear that currency depreciation will not able to offset the entire impact of the tariffs [enforced by the US administration]”. Whether the Chinese government is intentionally depreciating their currency – which it has been accused of doing before by the US, the IMF and others – or the currency is weakening due to the Chinese economy slowing down, is harder to answer; nonetheless, it is helping to alleviate some of the impact of Trump’s tariffs.
Gary’s market comments in conjunction with our investment partners
LGT’s portfolios have performed extremely strongly on a risk-adjusted basis versus their peer group, as clearly evidenced by the ARC reports. However, LGT believe the model portfolios will further demonstrate outperformance in periods of market volatility. It is clear that heightened tensions around trade wars, the de-synchronisation of global economic growth and the divergence of monetary policy is likely to drive volatility higher from here. We believe the model portfolios are well positioned to navigate this tricky market environment and continue to generate smoothed annualised performance for your clients.
This week sees the 7IM Investment Team conclude their asset allocation discussions, as to where financial markets may move over the next 3-12 months. With the external views gathered from the Asset Allocation Committee, the team will now conduct their usual asset allocation process, and subsequently change any positions in portfolios to reflect these views and support performance.
The team remains broadly neutral on portfolio risk versus longer term strategic asset allocation, but continues to look at the likelihood of tail risks coming to the fore. Here, the key risks that remain include a Trump-led trade war becoming more tangible as more nations become pitched against the US view of the world, and whether Italy will once again need to hold elections if the coalition government fails.
Sources: LGT Vestra and 7IM