Please find below our Weekly Market Update for the week ending 27th July 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
The EU and the US have declared a temporary ‘ceasefire’ in their trade battle, following a meeting between US President Donald Trump and European Commission President Jean-Claude Juncker on Wednesday. During the summit, held at the White House, they agreed to work together on eliminating Transatlantic trade barriers for many industrial goods, and to a pledge to look at reforming the World Trade Organisation. Interacting with the Press afterwards, the pair proclaimed a ‘new phase’ in relations which will include the commencement of talks to reduce future tariffs and other trade barriers. The two sides also agreed to halt on any new tariffs while the extended discussions proceeded, in what appears to be a significant victory for the EU.
The US President has been facing a growing backlash from business & farm communities in the US, as well as from members of his own Republican party, to tariffs he has either imposed or threatened. Therefore, as vague as this deal between the US and the EU is, it is at least a momentary victory for both sides, easing pressure from within their own constituencies to resolve the downward spiral in relations.
In regard to the US’s domestic economy, the Summer of 2019 will see their current economic expansionary period become the longest in history. However, concerns that the US economy could capsize before, or soon after, it breaks this record are plentiful. In a recent survey conducted by the Bank America, most fund managers in the US thought that the next recession could strike as soon as the end of 2019 – although the rise in 2-year US Treasury yields is suggesting it could happen even sooner. Investors seek the refuge of bonds, in this case US Treasuries, when they believe things will soon go downhill and want to swap the volatility of equities for the reassurance of fixed-interest returns. Although things are currently going well for the US, currently having arguably the best performing economy in the developed world, these actions and comments from investors serve a timely reminder that the economy cannot perform this well forever.
Gary’s market comments in conjunction with our investment partners
For a long time, the Chinese economy was characterised by high investment and low consumption. While this combination has contributed to China’s strong economic expansion over the past decades, it has also caused many structural problems such as excess industrial capacity and increased corporate debts. To protect the sustainability of its growth, China needed to rebalance its economy from an investment-driven model to one that was more consumption oriented.
With the growth of the middle class and rising incomes, Chinese consumer behaviour has undergone remarkable changes. First, consumption upgrades are under way, with consumers moving from mass products to premium products. Second, consumption is shifting from predominantly physical goods to services. Third, retail sales are rapidly moving online with online sales surging at over 30% year on year.
The Chinese consumer is truly on the rise.
In December 2016, 7IM’s investment team took the decision to reduce the allocation to Real Estate Investment Trusts (REITs) to zero. Since that date, the sector has underperformed equities by around 10% given investors looked to shun any investments that could be seen as bond proxies. In addition, the UK real estate market has seen a negative impact because of uncertainty around Brexit.
Now, however, 7IM believe that there is an opportunity given that REITS provide investment returns similar to the recent levels of equity markets, but can often have a lower correlation due to the fact that the returns stem from a diverse index where the underlying investments each operate different business models from one another. Meanwhile, the contractual leave obligations provide for a stable income that appeals.
Sources: LGT Vestra and 7IM