Please find below our Weekly Market Update for the week ending 7th June 2019.
The last week saw most world markets much more stable and gently trending upwards. This was largely because the previous week had seen them oversold, but also a reaction to general economic news, whilst mixed, being promising in some areas. Volatility is always discomforting, but as we have commented regularly in the last year, is a very normal feature of investing. If we set Brexit aside, at least for a moment, the next major news to set the direction of markets is what will be the outcome of Trade negotiations between the US and China. These discussions have far reaching implications for all economies and set the scope for future economic growth. It is currently impossible to see what the catalyst for their conclusion will be, but we remain confident a deal will be reached. Stock market valuations are forward looking and tend to do well when companies have clarity around future economic conditions.
In the UK, Brexit and politics will dominate over the normally quiet Summer period and the story is much the same in that we need both progress and certainty to move forward. Economic news via the Purchasing Managers Index showed the economy was flatlining. In concert with LGT Vestra, we remain convinced the UK remains a stock market with a lot of potential over the medium term.
We thought it would be interesting to comment on the Indian market, which is represented in virtually all our portfolio’s albeit in modest amounts commensurate with the risk approach. Narendra Modi’s re-election has seen the stock market reach record levels and is attracting large inflows from foreign investors, keen to benefit from the tremendous potential. The Government has cut interest rates again and our view is that, with most of the important, basic building blocks in place, the future looks very positive for investing sensibly in India. This is an exciting market, of course it carries risk, but the upside is significant in the long run and the right place to have a small allocation for most investors.
One strategy we are pleased to say we have not held is any of the funds managed by Woodford, which you may have seen in the press has been struggling amidst substantial outflows from their funds.
It would be remiss to not briefly reference the truly wonderful D-Day Commemorations and hope that the lessons of co-operation and bravery can translate to the World’s leaders in the current time of so much discord.
The following is the latest update from our partner LGT Vestra
After a strong first four months of this year, global equities had a ‘difficult’ May, with risk-off sentiment accelerating throughout the month. The S&P had its third worst month in the last 92, behind December and September last year which saw declines of -9.0% and -6.8% respectively. During May the FTSE 100 fell 2.4%, European markets fell 4.4%, the S&P fell 5.7% and Emerging Markets fell 6.7%, primarily because the markets learnt that trade talks between the US and China were not progressing as well as initially thought. It now appears that all eyes will be on the upcoming G20 meeting in Japan (28th and 29th June), where Trump and Xi are expected to next meet. This meeting, if it happens, will give markets further direction. On the back of this uncertainty, as expected, Emerging Markets suffered the worst. They were dragged down by China as the country continued to let the yuan devalue in order to retain a competitive edge on the global stage.
More recently, we have seen Trump add Mexico, India and Europe to his list of countries where he would like to impose/renegotiate trade terms. This has caused further uncertainty in global equity markets. At the same time, these are significant announcements. As in the first three months of this year, Mexico has overtaken Canada and China to become the largest trading partner for the US with about $50 billion a month in imports and exports so far this year. In terms of India, he has threatened to take away India’s ‘special trade status’, causing further uncertainty. Let us hope that Trump’s visit to the UK this week does not cause him to extend further tariffs across to Europe.
Despite the tougher backdrop, we have maintained our exposure to global equities. We continue to see relative value in this asset class, especially as both policy and macro data throughout the US and Asia remain supportive of equities. Recent year-on-year corporate earnings (particularly in the US) have surprised to the upside; further strengthening our view to maintain our equity exposure. We continue to bias towards active funds with the ability to generate outperformance through periods of market volatility.
