Please find below our Market Update for the week ending 24th August 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
It has been a consistent part of discussion in recent weeks, but the USA has, on Wednesday, now officially broken the record for the longest bull run in their history. From the depths of the Financial Crash in 2008, aided by central bank stimulus and fuelled by technological innovation, the S&P 500 has gone 3,453 days without falling by 20% – which typically defines a bear market. The run has just surpassed the 1990-2000 bull market run, that culminated in the ‘dotcom’ boom. The record run, that began in March 2009, has also coincided with a technological revolution – in 2009, the three largest companies in the US were ExxonMobil, Walmart and Microsoft respectively. They are now Apple, Amazon and Alphabet (Google’s parent company). As a further example, the share price of Apple has grown by just under 2000% since 2009, while Amazon’s share price has risen by 3000%. Overall, the S&P 500 index closed, on Wednesday, up a staggering 323% from the start of the bull market, although in comparison the latest rally has actually been fairly sluggish, at an annualised rate of return of 16.5%, compared with the 22% average for bull runs in the US. Nonetheless, in an interview with Fox News, Donald Trump hailed his administration’s economic performance, and warned of the consequences if he were to be impeached, in remarks made two days after his former lawyer pleaded guilty to campaign finance violations with Trump being implicated in the process. The US President said he does not “know how you can impeach somebody who has done a great job” adding, “if I ever got impeached, I think the market would crash”.
In England, newly appointed ‘Brexit Secretary’ Dominic Raab has released roughly 20 technical notes on what the consequences of a ‘no-deal’ Brexit scenario would be. While his rhetoric remained confident on the probability of the UK walking away from the EU with a good, tangible deal, he has likely released these papers in an attempt to persuade Brussels that the UK is prepared to walk away from negotiations if necessary, while at the same time trying to reassure UK businesses and the public that whatever happens when the government formally leaves the EU in March 2019, they have a clear contingency plan in place. This move comes after UK Trade Secretary, Liam Fox, said there was a “60-40 chance” of failing to reach an agreement with the EU, while Foreign Secretary Jeremy Hunt said Britain was heading for a “no-deal by accident”, and Bank of England Governor, Mark Carney, said the risk of a no-deal Brexit is “uncomfortably high”. These comments, along with the frustration from investors of limited progress on Brexit negotiations, have largely contributed to the pound falling 4.5% against the US dollar and 4.3% against the euro in less than 8 weeks, as it continues its steady decline from April’s high. The report, which includes guidance on importing & exporting, money & tax, and workplace rights, is likely to be an attempt of damage limitation by the Brexit Secretary, as he looks to gain some respect back from the British public over the governments performance during Brexit, while also trying to reduce the EU-favoured asymmetry that is currently apparent in the negotiations. Whatever the reason, it should calm the nerves many investors who, just last month, believed they were facing the prospect of mass food shortages and stockpiling goods in preparation of a no-deal.
Gary’s market comments in conjunction with our investment partners
Emerging Market bonds have suffered significantly since Turkey’s recent financial meltdown, meaning that investors are getting paid more than 5% over US government debt for investing in EM HY corporate bonds. The potential effect of trade wars has been amplified since the start of the year in line with increased threats from Trump; as have geopolitical risk levels such as those we have seen recently in Turkey, Argentina and Brazil in Q1. These two factors have an impact on bond fundamentals and suggest to LGT Vestra, for the time-being, that they should wait to see how one or both play out before adding exposure to Emerging Market debt to portfolios. The net effect of a fall in the oil price also needs to be considered, however this can be inconclusive as some countries are net exporters and some are net importers.
While 7IM portfolios saw an increase in fixed income holdings as a result of decisions taken during the last tactical asset allocation discussions, the proportion of portfolios allocated to bonds remains low (29.5% using the value of a Balanced portfolio as an example) versus our long term strategic neutral position – off by nearly 10%. In addition, 7IM’s overweight for emerging markets exposure means that even this 29.5% allocation looks higher than it is with regard to developed market holdings.
However, it’s a position that 7IM are happy to maintain as interest rates are set to continue to rise in the UK and US. And the European Central Bank (ECB) has started talking about interest rate moves after the end of its bond buying programme, which is still set to cease by the end of the year.
Sources: LGT Vestra and 7IM