A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Market data
Retail sales weaken
The UK economy continued to show signs of weakness as retail sales volumes fell 1.2% month to month, below the consensus of -0.8%. The year-on-year growth rate decreased to 0.9%, from 4% in April, well below the consensus of 1.6%. The disappointing figures gave more weight to the argument that Brexit is starting to hurt consumers as real incomes are falling at the fastest rate in three years, caused by a mixture of rising inflation and sluggish growth.
Trade surplus falls in Eurozone
The strong momentum seen in the Eurozone trade data this year weakened as the seasonally adjusted trade surplus fell to €19.6bn in April, from €22.2bn in March. The European trade surplus remains healthy though and will remain in place throughout 2017, however the slowdown in the UK and the continued strength of the Euro is beginning to hurt.
Fed hikes rates
The Fed increased interest rates by 25bps and continue to forecast a total of three rate rises for this year. It would have been a shock to the market if the Fed hadn’t continued their interest rate policy. The Fed’s statement referred to the labour market, which “continued to strengthen” and argued that continued gradual rate rises are consistent with moderate growth and tightening in the labour market.
Landslide victory in France
French voters must be relieved that the last three months, which have seen them in polling booths four times, are over. They now have a new president and legislative assembly in place. Emmanuel Macron’s party, EnMarche, claimed a historic majority on Sunday night. They achieved the biggest majority in 15 years. Macron will now have the power to push through much-needed economic reforms.
Gary’s market comments in conjunction with our investment partners
This week we focus on Japan as company valuations appear more attractive. Unemployment fell to 2.8% in April 2017, the lowest in more than two decades, a level that has not been seen since the early 1970s.
Japan’s trade has grown since the start of the year in both exports and imports. Domestic stocks are starting to outperform export stocks, this matches with the reversal of the Japanese trade balance and the strengthening of the Japanese Yen. Japanese funds with a focus on domestic mid cap stocks have been introduced into the Growth and Adventurous portfolios.
PORTFOLIO ACTIONS
The team is nearing the end of the quarterly Tactical Asset Allocation (TAA) process and will soon be in a position to implement their investment decisions. The TAA is a periodic deep dive on the existing positions within the portfolios and any potential investments accessible within the risk boundaries of each fund. The team develop various scenarios which they believe the world could be in over the next 3 –12 months and then forecast returns for each major asset class. They then invite an external committee of economists and political consultants to assign probabilities to each scenario. The returns forecasted by the team are then overlaid on the scenario probabilities to produce expected returns for each asset class. The team then use these outcomes to drive their investment decisions.
Sources: LGT Vestra and 7IM
