Please find below our weekly Investment Snapshot for the week ending 13th April 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Gains made early this week in the healthcare, financial and energy sectors helped recoup some of last Friday’s big losses; resulting from the ongoing trade dispute between the US & China, and from Fed chair, Jay Powell’s, comments endorsing a ‘patient approach’ to raising US interest rates. The S&P 500 was down 2.2%, while the Dow Jones was down 2.3%, at the end of Friday’s session. As markets rebounded this week, with a large amount of help from the previously mentioned sectors, investors took a more optimistic view of the enduring trade quarrel. This is after Trump made (rare) conciliatory tweets, meant for China’s Xi Jinping, encouraging an aim to ‘make great progress together’, with Xi Jinping later making a speech that seemed to mirror that hypothesis. Interestingly, from an economic perspective, the impact the supposed trade tariffs will make on the two leading economies will be minor, compared to the impact it has already had on global financial markets. For example, the fiscal stimulus in China, i.e. the amount of public spending from the government, reached $1.16tn in 2017, whereas the proposed tariffs are estimated to cost China less than $100bn. This points towards the notion that this is much more to do with politics and will actually have less of an impact than previously concurred.
In other news, growing concerns over the situation in the Middle East has led oil prices to reach their highest level in over 3 years, allowing traditional ‘safe havens’ like Gold and the Yen to move higher. Donald Trump heightened geopolitical worries as he warned Russia to ‘get ready’ for ‘nice and new and smart’ missiles to be sent to Syria in response to alleged chemical attacks on Syrian civilians. Nerves in the region were intensified after reports that Saudi Arabian air defences intercepted a rocket over their capital, Riyadh, supposedly from Yemeni Houthi rebels, as their conflict continues. All this political tension led oil prices to be at their highest since 2014 – at $73 a barrel – although it currently sits slightly lower at $71.98 per barrel.
The British pound hit $1.422 on Wednesday, its highest level since hitting a 19-month high in January of this year. It has been helped along by a weakening euro and dollar, but is certainly a cause for concern as the currency continues to rebound. The UK has already experienced lagged economic performance in recent months as the pound strengthens and UK business becomes less competitive as a result. Nonetheless, this only supports the argument for a UK interest rate rise next month.
Gary’s market comments in conjunction with our investment partners
As a function of LGT Vestra’s fund selection bias to quality & defensive strategies, the portfolios have an underweight exposure to the oil sector. At this point in time, oil stocks (excluding Exxon which is included in a large majority of ETF indices and active funds) are undervalued. Looking at price to cash flow, multiples look attractive as investors have not priced in the increase in the oil price that has happened over the last year. By increasing exposure to oil companies now, LGT are buying these stocks at an attractive value point.
While volatility has made a come-back, 7IM still believe that the underlying fundamentals that should drive stock markets are solid, with company earnings’ forecasts improving and most major economies still set to deliver good growth levels. With this in mind, 7IM have made some changes to their equity holdings to benefit from this backdrop. For example, they have cut their European allocation by 1% of portfolios and used the profits to increase US and Japanese equity holdings.
Sources: LGT Vestra and 7IM