Please find below our Weekly Market Update for the week ending 22th June 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Investors are pulling record amounts of money out of global & emerging-market equity funds over the past week, as a result of rising trade tensions and a strengthening dollar, which has sent a shockwave through east Asian markets. Global equity funds experienced a record weekly outflow of $8.1bn, while emerging-market equity funds were not far behind with their own record weekly withdrawal of $6bn. These withdrawals came in the same week that the White House moved to impose tariffs on $50bn of Chinese imports, and threatened tariffs on $200bn more if Beijing retaliates. The speed at which the trade battle is deteriorating is causing much concern from investors, who apparently would prefer to eliminate the risk by removing themselves from global markets.
At the same time, the dollar has rallied to its highest level in over a year in response to last week’s interest rate rise by the Federal Reserve, of course supported by the continuous signs of strength within the US economy. The dollar index, which measures the US currency against a basket of its peers, has now grown 1.18% over the last fortnight – meaning the index has grown 5.87% over the last month. In a world that is so dependent on the US dollar, especially in emerging-market nations, the impressive rally of the currency is causing a lot of problems for these smaller nations, even more so in regard to trade.
The trade dispute, coupled with the strengthening dollar, has culminated in east Asian markets experiencing a sharp sell-off, with major exporting nations being hit particularly hard. The Chinese Shanghai Stock Exchange has fallen 4.32% over the last week, the Korean Kospi index has dropped 3.83%, and the Hong Kong Hang Seng index also fell more than 3% since Monday. Japanese markets have managed to avoid most of the impact, as the Topix decreased 1.48% and the Nikkei index briefly went below a 1% fall, before recovering at the back-end of the week where it now stays essentially unchanged from last week’s close.
Meanwhile, the Bank of England (BoE) this week voted to hold interest rates at 0.5%, at their Monetary Policy Committee meeting on Thursday. However, what is most notable from the meeting is that the BoE’s Chief Economist, Andy Haldane, voted to raise interest rates. This has widened the split on the Central Bank’s rate-setting panel, and also stoked expectations of an interest rate rise for the UK in August. The news of Haldane’s vote sent the pound higher, which has rose 0.82% since the meeting on Thursday.
Gary’s market comments in conjunction with our investment partners
As the trade dispute appears to escalate, LGT continue to remain positive in regard to US equities. They use the Artemis Global Income fund for portfolios across all risk profiles, in order to provide differentiated exposure to global equities. Jacob de Tush-Lec, a fund manager for LGT, runs a ‘value-skewed’ investment strategy and actively adjusts exposure to different geographical areas through analysis of dividend growth, core income and risk & special situations. He has been adding private equity exposure to the US by buying companies such as KKR, and adding holdings which reflect a view of a reflationary environment such as cement, steel and energy companies.
The team has begun its formal quarterly tactical asset allocation process to determine whether its portfolios need to be revised, based on current market conditions and economic expectations. The process starts with a review of all the main regions of the world, looking at economic and political developments that could impact asset returns over the next 3- 12 months. The team then draws up a set of forward-looking scenarios that are presented to the Asset Allocation Committee, which consists of the 7IM investment team and external representatives, who provide expert insight into economics, financial markets and politics. The team then assesses the probability for each scenario, and then overlays these probabilities onto forecasted returns to produce expected returns for each asset class. This information is then used to tilt portfolios versus the strategic asset allocation.
Sources: LGT Vestra and 7IM