Please find below our weekly Investment Snapshot for the week ending 25th May 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
The US has seemed to take a step back from the brink of a trade war with China, at least for now, after US Trade Secretary, Steve Munchin, announced on Monday that the US Government has halted plans to impose tariffs on China of up to $150bn of imports. This declaration follows a joint statement made on Saturday by the US & China, in which Beijing promised to ‘significantly increase’ it’s purchases of American farm exports & energy, and both sides will also continue diplomatic talks over the Summer. This is certainly a positive outcome for investors, from a situation that threatened to disrupt the synchronised global economic recovery. The S&P 500 grew by 0.7% on Monday and has now grown by 1.72% over the last week, while the Shanghai Stock Exchange (SSE) has grown by 1.91% this week, highlighting the improved sentiment over the ongoing trade dispute.
The news has also allowed the dollar to continue it’s 2018 ascent. The dollar index, which measures the US currency against a basket of it’s peers, rose 0.4% on Monday to a fresh 2018 high of 94.028 and now sits at 93.64, growing almost 5% overall over the last 3 months.
The resurgence of the dollar this year does have some quite significant negative implications, though. The large majority of Emerging Market nations are ‘net importers’, meaning they import more than they export. These countries largely trade in dollars, and also import a lot from the US, so as the dollar continues to strengthen, the costs of their imports increase. Not only this, but many Emerging Market countries have high amounts of dollar-denominated debt, and as the dollar increases, so does the value of their debt. This has therefore caused investor sentiment towards Emerging Markets to turn negative, and has led many of these markets to perform badly. India’s Nifty 50 has fallen 3.44% this week alone, the South African Jalsh index has fallen 2.69% in the same amount of time and most notably, Turkey is spiralling into economic turmoil. The Turkish Lira has plummeted 5.1% against the US dollar in the last 10 days, and 12% overall since mid-April. Following an emergency Monetary Policy Committee meeting, the Turkish Central Bank has raised interest rates to 16.5% after demands from investors to halt the slide in the currency.
Gary’s market comments in conjunction with our investment partners
A theme that is being discussed with increasing frequency in meetings with fund managers is the role of disruptive technologies and tech disintermediation. The pace at which technology is changing the world is providing huge opportunities on the one hand (such as AI) but also risks on the other, and LGT say their role as investment managers is to ensure that they are investing in funds that are aware of structural changes, and that are themselves investing in companies that are willing and able to keep apace of changes. LGT are of the belief that, barring intervention from the US government or the EU on the grounds of anti-trust law, the strong will continue to get stronger and that platform businesses that can benefit from network effects, such as Amazon, are well placed to benefit from their position of strength.
The 7IM Investment Team is in the process of switching its US Treasury holdings to a broad global government bond index tracker. This more diversified fund will be used on conjunction with a bespoke basket of bonds sourced directly by the team. The new tracker fund provides two main benefits: it is easier for 7IM to change their tactical asset allocations, managing the positions we want to hold versus the longer term strategic asset allocation; and it provides greater diversification given the current exposure to the US is 27%, versus 100% previously. The diversification also means 7IM are able to tap into other assets that are seen as ‘safe havens’ (such as Japanese bonds) and allows the team to change duration and regional allocation, while maintaining their current currency exposure. The fund is also a cost-effective approach to managing their government bond exposure.
Sources: LGT Vestra and 7IM