Please find below our Weekly Market Update for the week ending 14th June 2019.
Blue Sky Comment
WEEKLY MARKET UPDATE
We are not going to touch on Brexit directly this week as enough is pouring into our conscious and subconscious every single day. We will however touch on the UK as a place to invest with an update from one of our investment partners, LGT Vestra.
In addition, a quick update on the rise in oil prices yesterday following the attack in the Gulf of Oman and some good news regarding the expected credit stimulus in China.
The UK…an update
“UK equities have only traded on a higher dividend yield (DY) relative to UK gilts once in the last 100 years; that was World War I. The gap between the cost of debt and equity funding is aggressively wide; the financing incentive to buy UK shares for activists, corporates and private equity has rarely been more extreme. But, no one wants to know. The UK equity market has seen record net outflows over the last 12m and 36m. Brexit, Corbyn, Johnson, Trump, Trade. Uncertainty rules (the waves).” – Citigroup, June 2019
Many investors have been nervous about allocating to the UK over the past few months with some reducing exposure in the same way most asset managers did in 2016 when the initial referendum took place. However, since the start of the year, LGT Vestra have kept our UK allocations static within the model portfolios. This has been fruitful so far, with Lindsell Train UK Equity and Merian UK Smaller Companies posting year to date returns of 17.90% and 16.09% respectively.
The defensive and high quality nature of the holdings within the Lindsell Train UK Equity Fund have benefitted from the rally seen at the start of 2019 as well as being able to weather more recent volatility in equity markets. In addition, UK Small Cap space has become attractive over recent months, primarily because of the sell off at the end of last year. It has been clear that utilising an active manager across the small and large cap space in the UK has paid dividends, as significant alpha has been generated by the active managers of these two funds versus the relevant benchmarks. The UK market overall has shown more resilience than initially anticipated so far this year. The fact that there is so much ‘Brexit bad news’ priced in continues to make the geography relatively attractive, particularly if we get some clarity over the direction of Brexit before the end of the year.
Oil price rises
Yesterday, two crude tankers in the Gulf of Oman were attacked and their crews evacuated. As a result there was a 4 per cent surge in oil prices . The attack will heighten fears over the risk of further conflicting erupting in the Middle East . Brent oil traded up 4.3 per cent at $62.57 per barrel. Shell & BP shares rose strongly.
The global economy is set to improve due to an increased credit stimulus programme by China in response to the tensions over trade wars according to Saloni Sardana in an article in the FT Adviser.
This comes as China’s “credit impulse”- a measure of the change in new credit issued as a percentage of GDP- has been increasing.
China, the world’s largest economy, is cutting reserve requirements, incentivising lending and extending credit in some parts of the economy to respond to growing trade tensions between China and the US.
Amo Lawrenz, global investment strategist at Ashburton Investments, said: “Now with Chinese authorities reversing tightening efforts, the impulse is trending back up.”
He added: “It [China’s credit impulse] is considered a key driver of economic and investment growth in China, as well as a significant indicator for the global economy. Its fluctuations are correlated to – and often precede – economic changes in global markets.”
Mihir Kapadia, chief executive of Sun Global Investments, said: “A boost to China’s credit will have an impact on the global economy as the credit injection will no doubt support the economy, which is currently unnerved by the global macroeconomic fears such as the slowdown in the economy and the trade war with the US.”