A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
UK OUTPUT DROPS
Manufacturing output fell by 0.2% in May compared with April. This was due to a 4.4% drop in car production, the biggest fall since February last year and reflects a sharp decline in new car registrations. Meanwhile, construction output also fell by 1.2% in May from April, compared to expectations of a 0.6% rise. It was also down 1.2% in the three months to May – the sharpest such drop since October 2015.
UK Wages lag inflation
Britain’s workers suffered a further squeeze on pay in the three months to May even as the employment rate hit a record and joblessness fell to 4.5 per cent. Official data published on Wednesday showed a sharp contrast between poor wage growth and a buoyant jobs market. Annual average weekly earnings grew 1.8 per cent in total and 2 per cent excluding bonuses – roughly half the pace that was typical before the financial crisis. Inflation has accelerated to 2.9 per cent this year due to sterling’s depreciation after last summer’s Brexit vote.
EUROPEAN PRODUCTION ON THE RISE
Industrial production beat expectations in three of the Eurozone’s largest economies in a sign of broadening and strengthening momentum in the region. Output growth in Germany unexpectedly accelerated in May, jumping 1.2% from the previous month, while gauges for France and Spain also exceeded forecasts, rising 1.9% and 1.2%, respectively.
US MONETARY POLICY MINUTES RELEASED
The Federal Reserve’s latest meeting minutes flagged a number of members are warning that allowing unemployment to fall too low could lead to the US economy overheating or the emergence of financial stability risks.
It’s important to look at the drivers of equity market returns since the financial crisis. We believe there is reason to be confident that this rally has the capacity to continue further, albeit with more volatility than has been in evidence recently.
Markets responded up until recently due to QE with Government buying bonds to support their economies. There has however been a sea-change in economic data in the west, with improved economic data from the US since last summer and more recently Europe.
There is still monetary stimulus from European and Japanese Central Banks and further planned stimulus from President Trump in the form of fiscal reform, a repatriation tax holiday and an incentivisation programme for increased capital expenditure. This capex incentivisation will benefit the US economy as it will encourage companies to reinvest cash on their balance sheets leading to improved productivity. A recovery is not only being seen at a country level, but we are also seeing company earnings figures improving which is supporting the evidence that macro-economic data is filtering down.
Gary’s market comments in conjunction with our investment partners
The model portfolios are run within volatility bands. This ensures attention is given to downside protection within the portfolios, and this is achieved by the use of the absolute return funds. Recent times (last two weeks of June) have put these absolute return funds to the test. With markets selling off on the back of nervousness of ECB QE tapering/UK interest rate rises, the absolute return funds were under the spotlight to withstand the equity market fall. As in previous equity drawdowns, the absolute return funds withstood the strain, reducing the overall volatility in the portfolios and protecting the downside thus ensuring that the capital value was better preserved in the portfolios.
Private equity firms have had a very strong run over the past few years but the current situation is suggesting that further outsized gains may be limited from here. As a result, 7IM have reduced their overweight position. They may miss out on further upside, but prefer to be early in reducing risk.
Meanwhile, the dispersion product they owned returned nearly 5% in June as it benefitted from the difference between the volatility of the Eurostoxx 50 Index and the volatility of the underlying constituents of the index. Bond yields rose following the ECB’s comments that signalled a potential tapering of its loose monetary policy in the Eurozone, and which hurt the broader equity market but benefitted banks –a situation where the dispersion trade would benefit.
Sources: LGT Vestra and 7IM