Market commentaries

Below you will find our latest set of Monthly Market Commentaries covering a summary of the major investment markets and their respective returns within the period covered.
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January 2018 – Market Commentary

January saw another positive month for most major equity markets, but with the UK once again lagging, as the FT All-Share Index lost -2% during the month. The collapse of Carillion and a major profit warning from Capita combined with renewed Brexit uncertainty continued to undermine investor confidence. In the US, markets reacted well to President Trump’s new corporate tax package, and yields on the ten-year US Treasuries rose above 2.70% as economic data continued to point to an ongoing recovery. European data followed the same pattern, leading to further strength in the Euro. Inflation in the EU appeared to have peaked in November, removing some of the concerns that early rate rises might be necessary. Japanese inflation continued to move slowly higher, with the headline rate hitting 1.0%, which is encouraging, but still well below the Bank of Japan’s target rate of 2.0%. Further weakness in the US dollar saw it fall to more than 1.40 against Sterling, reducing US gains for UK investors. Conversely, however, this added to gains in the emerging markets, which benefit from a weaker Dollar due to their large exposure to US$ denominated debt.

UK

After the progress made in the Brexit talks in December, the New Year saw a return to the sense of drift in terms of how the EU negotiations were playing out, with little further progress being made. The perception of a badly handled cabinet reshuffle, the cancellation of non-emergency operations by the NHS through part of the month and the high-profile collapse of Carillion all added to the political pressure on the Prime Minister. Yet despite this, the opinion polls hardly changed, with the average of the polls year to date still showing a small sub 1% lead for Labour. Sterling was strong against the US Dollar, rising from U$1.36 to U$1.41, but this was more a reflection of Dollar weakness.

The UK macro data continues to reflect a tale of two economies, with very strong order books for services, manufacturers and exporters, in part due to the improving global economic outlook. Business and consumer sentiment remains weak, but maybe not as bad as the previous month, with retail sales showing some resilience. The chart below compares the buoyant CBI current order book survey with the weaker GFK measure of UK consumer confidence.

UK 4th quarter GDP came in slightly ahead of expectations at +1.5%, which represented a slowing from the previous figure of +1.7%. This rate of growth remains sluggish when compared to the rapidly improving rates in Europe and the USA. This may be due to the perceived slow progress and uncertainty on Brexit, along with the squeeze on real wages. This trend is set to continue into 2018, with the UK expected to be towards the bottom of the range in terms of Developed Economies growth rates.

Labour market data remains strong, with the January ONS labour market report showing the employment rate of 16-64 year olds at 75.3%, the highest since records began in 1971. Wage growth remains subdued, but there is some evidence that the pace of wage settlements seems finally to be picking up. UK wage growth edged higher to +2.4% (from +2.3%), still below the current 3.0% inflation level. But the gap is beginning to narrow.

Although there was little change in the economic data in the UK, bond yields rose significantly, in line with the trend globally. The yield on UK 10-year gilts went from 1.29% to 1.51%, which in the context of the Gilt market, is a significant move. Rising global bond yields and the weak US$ (which reduces the sterling value of US$ profits) acted as a drag on the FTSE100, which fell by -2%, with most of the fall in the second half of the month.

Rising bond yields and the weak US dollar made defensive dollar earners unattractive to investors, so sectors such as Utilities, Beverages, Food Producers and Tobacco performed poorly. M&A remained strong, with bids for GKN and UBM. Having already had a profit warning in December, Capita had an even bigger profit warning in January and the shares fell by nearly -50% as it cut profit guidance, cancelled the dividend and announced an emergency rights issue, as the outsourcing model that the company had based the business on came unstuck.

Europe

European equity markets were strong once again in January, and, as we saw at the end of 2017, it was the peripheral nations that led the charge, with Greek equities gaining +9.5% and Italian stocks rising by +7.6%. The core markets, Germany and France, rose by a more muted +2.1% and +3.2% respectively. Overall, the Euro Stoxx 50 Index of large pan-European companies gained +3.0% during the month, outstripping the MSCI Europe Small Cap TR Index, which managed a rise of only +1.9%. Investors favoured value stocks over growth at the start of the year, perhaps reflecting a more cautious tone, although the Economic lead indicators remain strongly positive for the coming year. Industrial and automotive equipment provided the biggest gains in the market, with water stocks being the only sector to produce a major loss, as Suez announced disappointing results and cited the independence struggle in Catalonia as one reason. Suez claims to have spent an extra $18.7m in 2017 to protect its interests in the region.

Government bonds in the Eurozone returned -0.4% overall, ranging from -1.1% from Germany to +0.4% from Italian issues, which continued to benefit from the recent electoral reform and upgrading of the nation’s credit rating by Standard & Poor’s. This performance was mirrored by the index-linked market, where German bonds returned -1.5% and Italian inflation-linked bonds gave +0.4% on the month. Overall, bond yields rose slightly, reflecting the expectation of QE tapering and possibly even a rise in the base rate this year.

Economic data continued to provide support for the markets, with GDP growth remaining strong and inflation and wage growth appearing to stabilise at a modest level. Unemployment also remained in a gentle downward trend. This combination helped to strengthen the Euro and the currency rose by +3.4% against the Dollar, creating a potential headwind for the region’s exporters.

European politics was dominated by the ongoing failure of German politicians to form a coalition. Angela Merkel spent much of January in discussions with Martin Schultz’s SPD and other parties, but by the end of the month, an agreement was yet to be reached on a new coalition Government for the EU’s largest economy. This inability to form a Government, four months after the general election, sees Germany in a state of political paralysis, which could potentially delay Brexit talks and Eurozone reforms, as both the UK and France regard German support, or acquiescence, as vital for the UK’s desire for a bespoke Brexit deal and President Macrons’ proposals for reform of the EU.

US

The economic data continued to surprise on the upside in January. Manufacturing, current order books, business confidence and investment surveys were particularly strong. Even when the economica data came in below expectations, such as the 4th quarter GDP, the underlying picture looked much stronger than the headline number.

Business confidence has continued to remain strong as the full impact of the Tax Reform Bill starts to feed through into the economy. We are seeing capital expenditure and business investment levels picking up after being subdued for a number of years. Domestically focused US corporations should see a material uplift in earnings and cashflows because of the tax cuts and we are already seeing examples of this uplift being passed on by companies such as Walmart to workers in terms of higher salaries and benefits. Analysts are rather slow in upgrading their earnings forecasts to take accounrt of the tax cuts, but these are now beginning to come through. Inventory levels remain very low by historical standards and the strong new order levels being registered by US surveys would suggest that an inventory rebuild is needed.

US 10-year treasury Yields closed 2017 at 2.46% (close to the highest point of the year), but the buoyant data both in the USA and globally, drove bond yields higher as the market began to price in further interest rate hikes and expected inflation increases. Yields went from 2.46% to 2.70% in just one month. More surprising was the weakness of the US dollar across the board, which surprised many investors given the strength of the US economy and the rise in US bond yields. But this may simply be a reflecting of the fact that economic expectations are rising faster in other parts of the world. The weak dollar was one factor which helped push the oil price to new recent highs. Brent briefly touched US$70, but the fundamentals remain supportive with solid global demand growth, falling inventories and OPEC extending its production cuts.

US equity markets continued their progress, with the S&P500 up +5.6% for the month. The S&P 500 recorded positive returns for each month since Oct 2016, the longest winning streak on record. Defensive sectors linked to bond yields, such as utilities were firmly out of favour. Proctor & Gamble fell by -6% on fears over its price-cutting strategy, GE was weak again, down -7% on a SEC investigation into its accounting and the admission that it expects its tax charge to rise, despite the tax reforms. Boeing rose by +20% on strong results, but Netflix did even better, rising +40% on much better than expected subscriber numbers.

Asia Pacific and Emerging Markets

Japan

January was a reasonable month for Japanese equities which returned +1.3% in yen terms. Although performance was below that of other developed markets, Japanese equities peaked at over 24,000 on the 23rd January, a level not seen since the early 1990’s. Market gains were led by larger-cap stocks with Toyota +5.6%, and Keyence +5.2%, the key contributors. Weakness in more interest rate sensitive segments of the market, for example, utilities and consumer staples, hindered stronger market performance. Economic data remained robust, with the Bank of Japan’s Regional Economic Report (a comparable document to the Fed’s Beige Book), signalling moderate expansion across Japanese regions and a “virtuous cycle” between income and spending, in the context of tight labour markets. In monetary policy, although inflation has continued to inch up over the course of the past year, readings on core inflation which rose +0.7% year on year, continue to be well below the Bank of Japan’s 2.0% price stability target. Unexpectedly, the Bank of Japan also slightly reduced its purchases of long-term government bonds, leading to a rally in the yen, and uptick in yields over the course of the month.

Emerging Markets

Emerging market equities had a strong start to the year, generating returns of +6.8% in local currency terms, around 3.0% ahead of developed markets. The Shanghai Shenzhen CSI 300 index was up +6.1% and whilst there was little new economic news during the month, Chinese consumer confidence remains very high by historical standards. January also saw an interesting shift in market leadership with value stocks, for example China Construction Bank (+25.0%) and the Industrial and Commercial Bank of China (+20.4%) recording solid gains, interrupting the outperformance of growth stocks which has been led by technology giants such as Tencent and Alibaba. Russia was the strongest performing major market, benefitting from the robust performance of energy stocks such as Gazprom (+9.9%) as oil prices rose. Brazil also had a positive month, with the BOVESPA Index rising 11.1% in local currency terms. The Brazilian market rose amid positive economic data with retail sales, industrial production and jobs data exceeding market expectations. Korea and India were the weakest major markets. Korea was impacted by a fall in the price of Samsung (which makes up over 25% of the market), following negative broker reports for the stock.

Disclaimer: FOR PROFESSIONAL USE ONLY.

This report was produced by Independent Strategic Research Ltd (“ISR”). The information contained in this report is for informational purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment. While ISR uses reasonable efforts to obtain information from sources which it believes to be reliable, ISR makes no representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are provided by ISR for professional clients only and are subject to change without notice. You must in any event conduct your own due diligence and investigations rather than relying on any of the information in the report. All figures shown are bid to bid, with income reinvested. As model returns are calculated using the oldest possible share class, based on a monthly rebalancing frequency and all income being reinvested, real portfolio performance may vary from model performance. Portfolio performance histories incorporate longest share class histories but are either removed or substituted to ensure the integrity of the performance profile is met. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance.

ISR and Independent Strategic Research are trading names of Independent Strategic Research Ltd, registered in England and Wales No. 09061794. Registered office: 34 Southwark Bridge Road, London, SE1 9EU, UK.

December 2017 – Market Commentary

December saw a strong end to the year from major equity markets, as investors prepared their asset allocations for 2018. Continued optimism following the re-election of Shinzo Abe in October, the passing into law of President Trump’s tax bill in late December and the last-minute agreement on the Irish border issue that was holding up Brexit negotiations all combined to provide the hoped-for ‘Santa Claus rally’, and markets closed in good spirits ahead of the new year celebrations. European politics was dominated by the failure of Angela Merkel to form a coalition government, three months after the general election, eclipsing, for the moment, the Catalonian independence question in Spain. Economic data published during the month pointed to steady and improving global growth, with wage growth in many areas appearing not to keep pace with inflation. The focus for the coming year, as in 2017, is likely to be on these data points, and their implications for monetary tightening in the major economies.

UK

December saw progress in the Brexit talks, with an outline agreement covering future UK budget contributions, the rights of EU citizens living in the UK and the border between the UK and the Republic of Ireland. This allowed negotiations to move to the next phase involving future trade agreements, which the equity market is anxious to see progress on, hence the positive reaction. Despite no firm date for these discussions to commence, markets reacted positively, both in terms of the FTSE100 and the equity prices of domestic-related assets. UK macro data continues to reflect a tale of two economies, with very strong order books for services, manufacturers and exporters, but weak business and consumer sentiment and signs of slowing business investment. This may be due to the perceived slow progress and uncertainty on Brexit, along with the squeeze on real wages. The two charts below highlight the two-speed nature of the current state of the UK economy.

UK wage data tends to be rather backward looking, often expressed as changes over a 3-month period, so more recent changes in the pace of wage growth take time to show up. That said, UK wage growth inched higher to +2.3% (from +2.2%) and the most recent data on private sector wage growth suggests a figure above +2.5%, but still below the current 3.1% inflation level.

This negative real wage pressure is currently dominating sentiment around the domestic part of the equity market and economy. But the Bank of England in its latest report, highlighted that "recruitment difficulties had intensified" and that "wage settlements were expected to be between 2.5%-3.5% in 2018". The latest data on EU migration into the UK showed those arriving looking for work (as opposed to those with a definite job) were at the lowest level for several years. This probably reflects a combination of apprehension over Brexit and the muchimproved labour markets within the EU. This will place increased pressure on the already tight UK labour market.

If wage growth moves towards 3% next year and inflation falls back towards 2% as sterling's depreciation effects annualise out, (sterling is currently 10% higher against the U$ v a year ago), then we could see the return to real wage growth, which should have a positive impact on consumer confidence and will then feed through into retail sales.

Having lagged global markets for most of the year, the FTSE 100 rallied strongly in December, up +4.9%, to close the year at 7687.8, a rise of +7.1%. M&A was strong, with bids for Ladbrokes, IWG and Regus and we had profit warnings from Saga and Capita. The strong global macro background helped drive commodity prices higher (Copper rose by 7%) and this was reflected in the very strong performance of the Mining sector.

Europe

The overall theme among the European equity markets during December was one of recovery among the smaller economies, led by Greece, which rose by 8.4%. Hungary, Portugal, Ireland, Austria, Luxembourg and the Netherlands also provided positive returns, in contrast to France, Germany, Belgium, Italy and Spain, which all fell during the month. Overall the Euro Stoxx 50 Index ended the month 1.8% lower, though small cap stocks, as measured by the MSCI Europe Small-cap Index rose by 2.4%, with investors seeking out growth opportunities among the region’s smaller companies. A rising oil price and encouraging economic data saw the mining companies sector index gain more than 10% to be the best performing equity sector, whilst the malaise in utilities continued, with telecom equipment manufacturers losing more than 18% and energy suppliers falling by more than 12%. Pharmaceuticals also performed poorly as investors took profits and these falls impacted incomeoriented portfolios.

Sovereign bonds, as measured by ‘All Stocks’ bond indices, across the Eurozone gave negative returns, ranging from -0.5% in Germany to -1.7% from Italian bonds, which had performed strongly in November, buoyed by electoral reform and the upgrading of Italian Government debt by Standard & Poor’s. Across the EU there was no clear pattern to be seen in bond spreads between the core and peripheral European markets. Index-linked and corporate bonds also performed poorly in December. The effect, if any, of the expected tapering of the European Quantitative Easing programme is hard to predict, but it is unlikely to be positive for fixed income markets in Europe. Since its inception in March 2015, the European asset purchase programme has grown to just under €2tn.

 

Although tapering is expected to start in January, asset purchases will continue until at least September, hence the ECB’s balance sheet will continue to expand for much of 2018. The ECB has also indicated that it will maintain rates at the current level. Low interest rates and easy availability of capital led to a supportive environment for equities during 2017, and this seems likely to continue into 2018. The strength of the Euro and relatively subdued inflation will help with this, though the Eurozone economy seems to be recovering well and corporate earnings growth is being reported. Investors may find plenty of cause for continued optimism, but it may be that continued improvements in growth lead, in due course, to talk of interest rate rises.

In European politics, Germany will enter the new year without a government and Angela Merkel’s CDU will shortly embark on a week of talks with their old coalition partners, Martin Schultz’s SPD aimed at piecing together another ‘Grand Coalition’. If this fails, the remaining options are a minority government involving the Bavarian Christian Socialists (CSU) or fresh elections, which would not be the favoured option for Mrs Merkel. The main point of difference that could scupper any chance of a deal in January is still migration. There are also other ‘pet projects’ of the SPD and CSU, such as healthcare reform and pensions, that could prove to represent insurmountable differences.

US

Most of the economic data points in December came in ahead of expectations, reflecting the depth and breadth of the US recovery. Adding to this, we saw the passage of the tax reform measures, the first major Trump success on policy, which will add momentum to an already strong US economy. Last month we commented that consumer, manufacturing and business confidence were already on multi-year highs and some of these data points have moved higher as shown by the chart below.

The Tax reform bill should encourage a further recovery in capital expenditure and business investment levels. Unlike the Reagan tax cuts of the 1980’s, this measure is firmly focused on the reform of corporate taxes. Domestically focused US corporations should see a material uplift in earnings and cashflows as a result. We are already seeing examples of this uplift being passed on by companies such as Walmart to workers in teams of higher salaries and benefits.

The Federal Reserve responded by raising interest rates and signalling further rate rises in 2018. We leave 2017 with US 10-year treasuries at 2.4% (close to the highest point of the year). Despite the buoyant economic data, there is little sign from either the consumer price or wage inflation data that the US economy is overheating. Core inflation remains subdued at just 1.5%, wage inflation – as measured by the Atlanta Fed Median Wage Tracker – rose by only 3.2%; but crucially, both these measures of inflationary pressures are running materially lower than a year ago.

US equity markets continued their steady progress, with the S&P500 up 0.98% for the month and 18.4% for the year. The S&P 500 recorded positive returns for each and every month in 2017, which is the first time this has happened in the 90 years of recorded data. Freeport-McMoran was the best performer, up 36% on the back of stronger metals prices and the resolving of a long running dispute at its Indonesian mine. Rising commodity prices and growing US oil production helped oil service giant, Halliburton, rise 17%. Having disappointed investors last month, GE remained under pressure, falling a further 5%.

Asia Pacific and Emerging Markets

Japan

Japanese equities ended 2017 in positive territory, returning 1.6% for the month and delivering a 22.2% gain for the year, in Yen terms. The market was led by financials and industrials stocks which rose by 2.8% and 3.0%, respectively. In corporate news, Sumitomo Mitsui Financial, Japan’s second largest bank, rose 6.6% following the Basel Committee’s decision to finalise regulatory capital requirements. Subaru Corp, surprised markets on 19th December, falling 7.0% after announcing lapses in final inspections for domestic vehicles, the automaker later recovered and ended the month down a modest 2.3%. Economic data exceeded expectations with GDP, inflation, retail sales and household spending figures all beating consensus estimates. Estimates of Q3 GDP growth were revised upwards to 0.6% (vs. 0.4% expected), with new data indicating that private demand was stronger than initially anticipated. Forward-looking data, also remains upbeat, with measures of business conditions in manufacturing and services remaining at, or near, five-year highs. In its final policy meeting for 2017, the Bank of Japan left its policy settings unchanged, maintaining the -0.1% interest rate on bank reserves and purchases of Japanese Government Bonds and ETF’s at an annual rate of ~¥80trn and ~¥6trn, respectively.

Emerging Markets

Emerging market equities had a solid December, generating returns of 2.6%, rounding off an annual return of 30.6% for 2017, in local currency terms. Larger capitalisation stocks generally underperformed mid and small capitalisation, as larger technology companies such as Tencent, Samsung and Alibaba underperformed broader emerging markets. Financial services had a good month, however, with China Construction Bank (+7.6%) and the Industrial and Commercial Bank of China (+4.7%) generating strong returns. In terms of country-specific equity markets, Taiwan was the weakest major market with iPhone suppliers Hon Hai Precision Industry (-4.8%) and Largan Precision Co (-21.8%) declining on reports iPhone X sales could come in weaker than anticipated. On the economic front, most data was in-line with expectations, however the stand-out was Chinese trade data, with both exports (+12.3% year-on-year) and imports (+17.7% year-on-year) coming in substantially ahead of expectations. In other news, the People’s Bank of China, in a surprise move, very modestly hiked money market interest rates (+5 basis points) shortly after the Federal Reserve also hiked interest rates, to signal its continued emphasis on reining in excessive credit growth.

Disclaimer: FOR PROFESSIONAL USE ONLY.

This report was produced by Independent Strategic Research Ltd (“ISR”). The information contained in this report is for informational purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment. While ISR uses reasonable efforts to obtain information from sources which it believes to be reliable, ISR makes no representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are provided by ISR for professional clients only and are subject to change without notice. You must in any event conduct your own due diligence and investigations rather than relying on any of the information in the report. All figures shown are bid to bid, with income reinvested. As model returns are calculated using the oldest possible share class, based on a monthly rebalancing frequency and all income being reinvested, real portfolio performance may vary from model performance. Portfolio performance histories incorporate longest share class histories but are either removed or substituted to ensure the integrity of the performance profile is met. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance.

ISR and Independent Strategic Research are trading names of Independent Strategic Research Ltd, registered in England and Wales No. 09061794. Registered office: 34 Southwark Bridge Road, London, SE1 9EU, UK.

November 2017 – Market Commentary

November was a mixed month for equities around the world. US equities continued their ascent, with optimism over the Republican tax plan, and Japanese stocks moved relentlessly higher following Shinzo Abe’s successful electoral gambit in October. The UK and Europe, in contrast, struggled with a weak energy sector and political problems that overshadowed the equity markets. Concerns over the lack of progress towards an agreement on the early preconditions of Brexit talks saw investors remain on the side-lines in the UK, whilst in Germany, Angela Merkel looked no closer to forging a coalition and providing the country with a stable government, two months after September’s inconclusive election. Economic data around the world remained supportive and attention continues to move steadily to the unwinding of QE and the return to ‘normality’ in interest rates. The UK saw a long-awaited rise in the base rate – the first in more than ten years, and the stock market took the news in its stride, whilst rates around the other developed markets remained unchanged.

UK

The UK saw its first rate rise since July 2007, which was entirely expected and had little impact on the bond market. However, the dovish statement that accompanied the announcement suggested that the next rise may be some time away, and this caused a short-term drop in Sterling, which it subsequently recovered. In the UK it has been noticeable that economic data points have rebounded somewhat from a lull in the summer, with most data points coming in ahead of rather muted expectations. Whilst manufacturing and export activity is strong, retail sales and consumer confidence is weak. This may be due to the perceived slow progress on Brexit, along with the squeeze on real wages.

UK wage data is very backward looking and changes in the pace of wage growth take time to show up. That said, UK wage growth for the September quarter was c. +2.2%, still below the current levels of inflation. This negative real wage pressure is currently dominating the news and sentiment around the domestic economy and equity market. But the Bank of England in its latest report, has highlighted that "recruitment difficulties had intensified" and that "wage settlements were expected to be between 2.5-3.5% in 2018". If wage growth moves towards 3% next year and inflation falls back towards 2% as sterling's depreciation effects fall out of the calculation after twelve months, then we could see the return to real wage growth.

In the November budget, the Office for Budget Responsibility's (OBR) gloomy forecasts for UK productivity growth dominated the headlines, with the OBR effectively downgrading the UK long term growth rate from +2.0% to +1.6%, which had significant impact on future tax revenues. The forecast date for the elimination of the deficit was yet again pushed further out. The budget did bring encouraging headline announcements on infrastructure and housing, but not the dramatic change of policy that some had predicted.

We had movement on Brexit at the end of November, with a broad agreement on the cost of exit seemingly agreed. We will see if the other issues associated with Ireland and the European Court of Justice are ironed out before the EU summit in a few weeks' time. The breakthrough on the Brexit divorce costs led to sizeable moves in the FX and bond markets, which flowed through to the mix in the equity market. The size of these moves shows how polarised the market is on the Brexit issue.

The FTSE 100 fell 2.2%, which was a sharper fall than either the mid or small cap indices. It has traded sideways for several months now. Sterling was strong, up 1.8% vs. the US Dollar, which weighed heavily on the FTSE, where the big Dollar-earning consumer staples sectors performed poorly. Concerns over a cash crisis at the MoD saw defence stocks under pressure. Centrica warned over poor performance in their US business and customer attrition in the UK. Tesco got the go-ahead for its acquisition of Booker and the shares rallied from their lows. A stronger oil price and a confident trading update saw Shell move higher towards the end of the month.

Europe

The European markets retreated in November, giving back some of their recent gains. The pan-European Euro Stoxx 50 Index fell by 2.8%, although small-caps were slightly more robust, losing only 1.8%. Whilst food retailing and diversified industrials were the most positive contributors. Health care and computer services also performed poorly, as did sectors exposed to discretionary retail spending. Across the individual nations, the worst of the developed equity markets was Spain, falling 3.7%, with Ireland at the other extreme, losing just 1.5%. Vestas, the world’s leading manufacturer of wind turbines, announced disappointing results, citing strong competition and price pressure within the wind energy sector. The company, which had been a stock market darling, missed the consensus analyst estimate for third quarter earnings by 15% and, in keeping with recent market reaction to poor results, the shares were immediately marked down by 21%, continuing to fall during the rest of the month.

Government bonds across Europe gave an average 0.3-0.4% positive return, whilst corporate bonds across the region lost 0.1%. Index-linked returns were in the range +0.6% to +1.3% as annual inflation appeared to resume its mild upward trend with a November CPI figure of 1.5% vs. 1.4% a month earlier. The best returns in both conventional and inflation-linked bonds came from Italy as Italian sovereign bonds continued their recent rally, having been upgraded from BBB- to BBB by Standard & Poor’s. The country’s bonds were also buoyed by the passing, in October, of an electoral reform bill that seems designed to prevent the populist Five-Star movement from gaining power in next year’s elections. The new rules, a mixture of proportional representation and ‘first-past-the-post’ are seen by supporters as making Italy more governable by encouraging coalition-building, particularly among smaller parties. However, other electoral experts have expressed concern that the new system will not produce a clear winner in next March’s election, based on current opinion polls.

Elsewhere in European politics, Germany’s Angela Merkel continued her struggle to form a coalition after September’s inconclusive election. With the AfD highlighting the fact that Germany has gone almost two months without an effective government, Mrs Merkel has been pressuring her former coalition partner, the SPD to form a new coalition, with talks scheduled for early December. The SPD leader, Martin Schultz, is also, allegedly, facing pressure from within his own party after rejecting the idea of a continued coalition partnership with the Christian Democrats. Unemployment in the Eurozone continued to edge lower, reaching another new multi-year low of 8.8% in October. The overall figure continues to be distorted by the high rates of particularly youth unemployment in Spain and Greece, but improvements in these countries are also contributing significantly to the improvement seen in figures for the EuroZone.

The Czech Republic has the lowest rate of unemployment at just 2.7%, whilst the rate in Germany is 3.6%. GDP growth, last reported in September, remains robust at an annualised 2.5%, up from 2.3% in Q2 and 1.9% a year earlier.

US

November saw a continuation of the strong sequence of economic data being seen globally, with the US leading the way. As the two charts below show, US consumer confidence and manufacturing sentiment are close to 20-30 year highs.

3Q17 GDP growth was upgraded to 3.3% and the composition was good, with less reliance on the consumer and a big pick up in business investment. The vast majority of economic data points came in ahead of expectations, reflecting the depth and breadth of the US recovery. We also had some progress on the Tax reform bill, which if passed could have a positive impact both on markets and the economy, particularly on capital expenditure and business investment levels.

Turning to oil, OPEC agreed to extend production cuts. We have seen material upgrades to global oil demand growth this year (and also for 2018), driven by the synchronous global GDP growth (with a major influence on oil demand being the economic recovery in Europe). We are also seeing a lower-than-expected growth rate from US shale producers, partly linked to higher cost inflation in that area but also because of less access to capital and a greater focus on returns versus growth on the part of operators. Shale is growing quickly, but not as quickly as some had forecast. However, progress on reducing the huge levels of crude oil inventory in the States remains muted, as non-conventional supplies of oil continue to increase.

US equity markets were very strong, with the S&P 500 Index up +2.8%. The S&P 500 has now recorded positive returns each and every month YTD, which is the first time this has happened in the 90 years of recorded data. Stronger than expected retail sales during Black Friday saw a strong rally amongst the retailers, with Wall Mart up 12%. House Builders were strong on the back of supportive macro data. GE, once the biggest company in the world, fell 10% on a poor set of results and a large cut in their earnings guidance. They also cut their dividend for the first time since the 1930’s.

Asia Pacific and Emerging Markets

Japan

Japanese equities rose in November, with the TOPIX Total Return Index increasing 1.5% in yen terms, slightly behind the MSCI World. The result marked a milestone in the Nikkei 225 which closed at its highest level since 1992 on 7th November. Market gains were led by Consumer Services (+3.8%) and Consumer Goods (+2.6%). Sony was among the biggest movers, rising 17.9%, on the back of strong results and bigger than ex
pected upgrades to earnings guidance. Economic data remained solid, with GDP rising 0.3% quarter on quarter, leading to Japan’s 7th straight quarter of growth, the longest since 1999/2000. Growth in the economy was driven by net exports and a rise in inventories, with private consumption and government spending detracting.

Emerging Markets

Emerging markets equities were negative in November, returning -0.8% in local currency terms. The decline was driven by large emerging technology companies, with Samsung (-7.8%), Taiwan Semiconductor (-7.0%) and Alibaba (-4.2%) all recording negative returns. Samsung was particularly impacted by a downgrade from Morgan Stanley, who argues the technology giant’s profits may suffer as demand for memory chips pulls back from cyclical highs. At a country level, the decline was broadly based however Russia’s MICEX bucked the trend, rising 2.85%, as the energy-heavy index benefitted from a rise in oil prices as OPEC agreed to extend production cuts until the end of 2018. Economic data in emerging markets was mixed. In India, industrial production and GDP came in below expectations, while the Nikkei Services PMI signalled a slowdown in growth of the services sector. Chinese data on industrial production (+6.2% year-on-year) and retail sales (+10.0% year-on-year) also fell short of expectations, however PMI data in the services and manufacturing sectors continues to indicate a relatively positive outlook. A recent trend of note in the Chinese manufacturing sector has been a widespread crackdown on polluting factories, coinciding with the Chinese Communist Party Congress in October, in which President Xi Jinping signalled greater prioritisation of environmental goals. This trend is being observed from a top-down perspective in producer price inflation, as the rationalisation of polluting industries (e.g. cement), appears to have contributed to higher quality, environmentally-compliant firms gaining additional pricing power.

Source: China National Bureau of Statistics: Producer Price Indices for Industrial Products reflect the trend and degree of changes in general ex-factory prices of all manufactured goods during a given period, including sales of manufactured goods by an industrial enterprise to all units outside the enterprise, as well as sales of consumer goods to residents.

Disclaimer: FOR PROFESSIONAL USE ONLY.

This report was produced by Independent Strategic Research Ltd (“ISR”). The information contained in this report is for informational purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment. While ISR uses reasonable efforts to obtain information from sources which it believes to be reliable, ISR makes no representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are provided by ISR for professional clients only and are subject to change without notice. You must in any event conduct your own due diligence and investigations rather than relying on any of the information in the report. All figures shown are bid to bid, with income reinvested. As model returns are calculated using the oldest possible share class, based on a monthly rebalancing frequency and all income being reinvested, real portfolio performance may vary from model performance. Portfolio performance histories incorporate longest share class histories but are either removed or substituted to ensure the integrity of the performance profile is met. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance.

ISR and Independent Strategic Research are trading names of Independent Strategic Research Ltd, registered in England and Wales No. 09061794. Registered office: 34 Southwark Bridge Road, London, SE1 9EU, UK.

October 2017 - Market Commentary
 

October saw equity markets across the world continue their ascent, with strong performances in most areas and the UK, once again, pulling up the rear as Brexit negotiations continued to provide a cloud over investor sentiment. In the Eurozone, Catalonia held a referendum on independence from Spain. The vote, declared to be illegal by the Spanish Government and accompanied by violence from the Spanish police, appeared to show strong support for the independence movement, and was followed by a formal declaration of independence, which has not been recognised by world governments. In Germany, Angela Merkel is struggling to pull together a coalition Government, following her election victory in September, whilst in Japan, Shinzo Abe is also settling into another term in office after his snap election win on 22nd October. The Japanese equity market is now at a 25-year high, whilst the UK and US markets have reached new all-time highs. Fixed income markets were mildly positive with the exception of the UK, where expectations of the November rate rise weighed on bonds. Hints were also given that the next rate rise would not happen for some time also hit Sterling. The global economic recovery appeared to continue on-track, with steady GDP growth being indicated, particularly in the US, whilst consumer activity, as measured by monthly retail sales, remained erratic in many markets.

UK

Brexit negotiations continued, but with little real sign of progress. EU Chief Negotiator, Michel Barnier, made some more conciliatory noises about wanting to make progress and David Davis alluded to further movement from the UK with regards to Teresa May’s implied offer of GBP20bn from her Florence speech.

It is now virtually certain that insufficient progress will have been made to allow progress onto trade talks in December. The UK Government is still trying to engage the EU on the territory of mutual economic benefit, whereas Brussels remains firmly focused on the political imperative that any deal with the UK makes it manifestly clear as to the economic ‘price’ of leaving the EU. As a result, the prospects and implications of a ‘no-deal’ departure are gaining increased comment and debate.

The economic news flow and the tone of the accompanying media coverage remains subdued and in marked contrast to the flow of better macro data across the world. Hope lies with an improved labour market, which is essentially the Bank of England’s focus, as it ponders the first interest rate rise in a decade. Growth remains sluggish, with the broad sweep of data moving in a sideways direction.

The labour market data continued to be at the more resilient end of the spectrum. Whilst real wages continue to fall against both CPI and RPI measures, employment and hours worked continue to grow, so overall the consumer is in a reasonable position, even if consumer confidence continues to drift lower. Retail sales data remains very volatile, and core inflation remains stubbornly high at +2.7%, just a fraction below CPI at +2.9%.

Following a dip in September, equity markets rallied, with the FTSE 100 index rising 1.6%, mid-caps up 1.8% and small caps up 2.1%. There were several profit warnings, led by one of the less well-known FTSE stocks, the medical products manufacturer, Convatec, which fell by 30%. Merlin Entertainments (owners of LEGOLAND amongst other attractions) fell 16% on weaker current trading and IWG (Regus) was down 32% on a major profit warning. Poor numbers from Glaxo, GKN and Barclays were not received well. Conversely, there were bid approaches for Millennium Hotels, Spire Healthcare and Aldermore. The rising oil price and some good results from BP made the oil sector the biggest contributor to the index rally and mining stocks also gained further ground.

Bonds did very little, with the UK 10 Gilt Yield drifting marginally higher to 2.38%. Sterling moved lower, from U$1.34 to U$1.32. Oil continued to grind higher on concerns over events in Kurdistan and signs of a further extension of the OPEC production cuts. It closed the month above U$60/bbl.

Europe

European stocks enjoyed another positive month in October, helped by a slight weakening of the Euro, which had begun to prove problematical for large-cap equities after its recent strength. The Euro Stoxx 50 Index of the largest pan-European companies rose by 2.2%, whilst small-cap stocks gained a similar 2.1%. French and German equities were among the strongest, gaining more than 3%. Technology stocks were among the top returning stocks during the month, whilst the telecommunications sector as a whole lost more than 13% after Nokia announced third quarter sales down 9% on the previous quarter and saw operating profit of €4.8bn vs analyst expectations of €5bn. Nokia shares lost more than 15% on the announcement, emphasising the trend seen in recent months for companies that miss their forecasts, even slightly to be severely punished by investors.

Fixed income markets were similarly buoyant with Government bonds across the continent returning +1.1%, slightly ahead of corporate bonds, whilst index-linked issues also saw small gains of less than 1%. Interest rates and the yield curve remained unchanged over the period.

In terms of economic data, the current state of the Eurozone appears favourable as unemployment continues to trend lower, reaching 8.8% in September. This figure is inflated by the high levels of unemployment, and particularly youth unemployment in Greece and Spain, and some further improvement seems likely as these markets recover. GDP growth continues to trend strongly with growth in the third quarter at 2.5%, up from 2.3% in the second quarter of 2017. Inflation, however, tailed off slightly in October, falling from 1.5% to 1.4%, and the consumer still seems reluctant to participate, with negative real wage growth in many areas and retail sales falling for the second successive month in August.

In Germany, Mrs Merkel’s attempts to form a coalition Government without her former allies, the Social Democrats, seem to be proving predictably difficult. Having seen the country lurch at least in a small way, to the right as the AfD share of the vote in September’s election grew, Mrs Merkel is now seeking to stitch together a coalition of more moderate parties. The foremost of these is the Free Democrats, and the Greens are also most likely to be involved. However, there are a number of issues that stand in the way of a deal being done. Firstly, the business-friendly Free Democrats are keen to get their hands on the Finance Ministry, whist Merkel’s conservatives are not keen to let it go. Secondly, Mrs Merkel’s national policy of moving Germany rapidly towards complete dependence on renewable energy sources is not a priority for the Social Democrats. The next step in this policy – the closure of the country’s coal-fired power stations, requires urgent attention, as the reduction of CO2 emissions is a key part of Germany’s commitment to the Paris climate deal. Hence it seems as though political horse-trading may extend into 2018 before a new Government is formed. Migration is also a point of disagreement between the parties and Merkel has lost support due to her handling of the migrant crisis.

Elsewhere in Europe, the issue of Catalonian independence persists. Catalonia is the richest part of Spain, but would inherit a large amount of debt if it were to secede. In addition, it would not initially be a member of the EU and would find itself negotiating trade arrangements and joining a waiting list for membership – which would need approval from all 27 states, including Spain. On balance, a breakaway by Catalonia seems unlikely, but the situation continues to develop away from the front pages, and the elections at the end of December will be a major determining factor as to how it is resolved.

US

The most recent US real economy news flow indicates that the US expansion remains alive and well. The Chicago Fed’s National Activity Index – the best available indicator of US economic momentum which has 85 separate inputs – improved sharply last month to a slightly above-trend level, and the anecdotally-sourced Fed Beige Book stated: “Reports from all 12 Federal Reserve Districts indicated that economic activity increased in September through early October, with the pace of growth split between modest and moderate”. Importantly, too, wage and price pressures were reported to be limited “despite widespread labour market tightness”.

Another data-point deserving of comment is the preliminary US GDP report, which showed a stronger-than-expected annualised gain of 3% and a YoY gain of 2.3%, the latter the most robust showing seen for two years. It’s also worth noting that the Philadelphia Fed monthly capex intentions response remained at an historically elevated level in October, which pushed the 6-month moving average to a new, multi-year high. In the past this index – albeit based upon a regional manufacturing survey – has proved a useful leading indicator of nationwide business investment, as the following chart shows.

On this basis, the extra-ordinarily buoyant survey capex readings seen in recent months suggest that US business investment will strengthen substantially further. Regional manufacturing surveys suggest elevated business confidence levels and investment intentions. Given that the consumer has done all the heavy lifting so far, it is encouraging to see US companies now joining the party. Despite a very tight labour market, there is little sign of inflationary pressures building up in the system. US core inflation rose by only 1.3% YoY in October – a very considerable way short of the Fed’s 2% target.

This positive economic backdrop, with minimal inflation along with positive updates from the earnings reporting season from US corporates has helped drive the US equity market to new highs. The S&P500 was up 2.2% and has now recorded positive returns in every month YTD, which is the first time this has happened in the 90 years of recorded data. We are now looking at 12 months of consecutive positive returns, which equals the records of 1935/36 and 1949/50.

The perceived predictability of the short-term interest rate outlook alongside low inflation meant that Bond Yields hardly moved, with US 10-year bond yields moving up from 2.33% to 2.38% and the yield curve steeping very slightly.

Asia Pacific and Emerging Markets

Japan

Japanese equities were again higher in October, with the TOPIX Total Return Index rising 5.5% in Yen terms, 2.9% ahead of other developed markets. The rally was led by Technology (+8.4%), and Industrials (+7.8%). Softbank (+9.5%) was the strongest performing company in the top 10, on speculation that Sprint Corporation (in which Softbank holds a majority stake) would merge with T-Mobile. However, political events dominated the news headlines with the general election occurring on 22nd October. The ruling coalition, led by the Liberal Democratic Party (LDP), achieved strong results, gaining almost 50% of the total vote and just over two-thirds of available seats. The results represent a decisive win for Abe and the LDP, and may provide the ruling coalition with the support required to change Japan’s pacifist constitution. The results also suggest a continuation of “Abenomics” which has sought to reflate and grow the Japanese economy. By several measures, Abenomics has been a success, Abe’s leadership has been marked by a steady decline in unemployment and an increase in the number of jobs to applicants, as well as robust growth in corporate earnings and a depreciation of the Yen.

Emerging Markets

Emerging market equities were positive in September, returning 3.9% in local currency terms, around 1.6% ahead of developed markets. Continuing the trend observed earlier in the year, technology companies such as Taiwan Semiconductor (+12.2%) and Alibaba (+7.1%) drove the performance of emerging markets. At a country level, India and Korea were the strongest performers, rising by 5.6% and 5.5%, respectively. Both countries appear to have benefited from solid economic data, with industrial production in India and overall GDP growth in South Korea, exceeding market expectations, despite the tensions with North Korea. However political events in China were the highlight of the month as the Chinese Communist Party held its 19th Party Congress between 18th and 24th October. Xi Jinping was re-elected General Secretary of the Communist Party and a new line-up of leaders was unveiled, with five of China’s top seven leaders in the Politburo Standing Committee being replaced. The event appears to have solidified Xi Jinping’s position as paramount leader of The Party, as “Xi Jinping Thought”, a body of work encompassing Xi’s political theories, was incorporated into the Party’s Constitution.

Disclaimer: FOR PROFESSIONAL USE ONLY.

This report was produced by Independent Strategic Research Ltd (“ISR”). The information contained in this report is for informational purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment. While ISR uses reasonable efforts to obtain information from sources which it believes to be reliable, ISR makes no representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are provided by ISR for professional clients only and are subject to change without notice. You must in any event conduct your own due diligence and investigations rather than relying on any of the information in the report. All figures shown are bid to bid, with income reinvested. As model returns are calculated using the oldest possible share class, based on a monthly rebalancing frequency and all income being reinvested, real portfolio performance may vary from model performance. Portfolio performance histories incorporate longest share class histories but are either removed or substituted to ensure the integrity of the performance profile is met. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. ISR and Independent Strategic Research are trading names of Independent Strategic Research Ltd, registered in England and Wales No. 09061794. Registered office: 34 Southwark Bridge Road, London, SE1 9EU, UK.

September 2017 – Market Commentary

September was dominated by political events: The German Bundestag elections, Brexit, the calling of a snap election in Japan and the ebb and flow of US/North Korean tensions. Theresa May made her all-important speech in Florence to try to re-start the stalled Brexit negotiations, whilst, elsewhere in Europe, Germany became the latest EU nation to see an increase in the populist/nationalist vote, although Angela Merkel’s CDU did retain its position as the largest party. Sorting out a new coalition without the SDP, CDU’s former partner, may be a long job, and may introduce some uncertainty into German politics. Japanese centre-right Prime Minister, Shinzo Abe, saw a sharp bounce in his hitherto poor approval rating as the opposition fell into disarray, and took the opportunity to call a snap election on 22nd October. Equity markets across the world were mostly positive, with the notable exception of the UK, where sentiment is increasingly being affected by the weak position of Theresa May as Prime Minister and the lack of progress over Brexit, with the uncertainty that this generates for businesses. Meanwhile, a generally more hawkish tone from central banks saw fixed income markets weaker during the month.

UK

The major news during September was Theresa May’s speech in Florence, in which she attempted to build bridges with other EU leaders with the aim of securing a favourable trade deal after 2019. The general consensus of opinion seems to be that Mrs May probably did enough to restart the stalled negotiations, but not enough to push them beyond the current sticking points of the ‘Divorce bill’ and citizens’ rights. In her speech, Mrs May requested a two-year transition period to allow new trade arrangements to be put in place smoothly, and she conceded that during this period, Britain would continue to be subject to EU rules, including the jurisdiction of the European Court of Justice. Mrs May also offered to pay enough into the EU to ensure that no member state will have to pay more (or receive less) during the current budget round ending in 2020. She did not mention a sum, but it seems likely to be about €20bn (£18bn).

Just hours after the Prime Minister’s speech, the credit-rating agency, Moody’s, cut its rating for UK sovereign debt from AA2 to AA1: its lowest ever credit rating. Moody’s stated the belief that Brexit will be negative for the country's medium-term economic growth prospects, and that growth will not recover to its historic trend rate over the coming years. In addition, the agency said that it expects significantly higher Government spending levels than currently predicted, leaving the UK budget deficit stuck between 3% and 3.5% of GDP, compared with a Government target of <1% in five years’ time. S&P, the other major ratings agencies, have yet to react.

Latest figures showed unemployment continuing to edge lower, reaching 4.3% and inflation returning to the 2.9% level seen in May. However, second quarter GDP growth was revised downwards from 1.7% to 1.5% and wage growth remained stuck at 2.1%. Whilst this figure is not helped by the lack of bargaining power of workers in the ‘gig economy’, the recent removal of the cap on some public sector wages may well have some effect over the coming months. Retail sales recorded their third successive monthly gain, rising 1% from July to August.



Source: Office for National Statistics

Equities sagged during the month, with the FTSE 100 losing 0.8%. Some comfort was found in the mid-cap space where the Mid 250 Index managed a gain of 0.4%, driven by value investors fishing for bargains in a generally weaker market. Investors’ attention was focused on Ryanair, as the company announced a failure to plan for pilot holidays, which necessitated the cancellation of up to fifty flights per day over a six-week period, leading to a fall of more than 9% in the shares, despite a 10% increase in traffic in September. Oil stocks led the market, gaining more than 17% as the oil price recovered by 7.7% over the month.

The pound jumped past the $1.36 level mid-month and hit a 15-month high of $1.3611 after Mark Carney was quoted as saying the probability of a UK rate increase had “definitely increased”, following the rise in inflation noted in August. Mr Carney subsequently reined in his enthusiasm, saying that rate rises were likely to be gradual, and settle at a level significantly below those seen before the financial crisis. Sterling retraced some of its gains, but still turned in a strong performance against all major currencies over the month, gaining 3.5% against the Dollar and 4.5% against the Euro, as expectations reflect a 75% chance of a rate rise in November.

Bond markets reacted predictably badly, with long-dated gilts returning -4.0% and their index-linked counterparts -5.0%. Corporate bonds in general recorded a loss of 1.9% according to the iBoxx UK Corporate Bond Index and Sterling High Yield bonds, those of poorer quality and more speculative in nature, returned +0.1%, being the only part of the fixed income landscape to remain above water during September. The UK yield curve steepened slightly on the change in base rate expectations.


Europe

September marked the best performing month for European equities this year, with stellar performances from the Dax, up 6.4%, EuroStoxx 50, up 5.1% and the Eurostoxx 600, up 3.8%. The rally was led by various key sectors such as basic materials, industrials and financials. In particular the banking sector performed well on the expectation of a tighter monetary policy going forward. Spanish equities lagged their counterparts gaining 0.8%, as performance was hindered by the upcoming referendum vote in Catalonia, which led to clashes between the Spanish Government and referendum voters. The biggest laggard from the region was Greece with the Athex Composite Index down 8.5%. Concerns around the country entering its final bailout review has worried market participants, who are now weighing whether the country can stand on its own once the bailout ends and how the final review will be conducted by the IMF.

In terms of economic data, business conditions remain robust. Euro Area Manufacturing PMI increased to 58.1, with output and new orders continuing to expand across Europe and the recovery looking very broadly based. Faster growth increases were registered in Netherlands and Spain, while slower but still strong growth was seen in Germany, France, and Italy. Notably, Greece saw its biggest expansion since June 2008. However, consumer confidence and retail sales from the region remain negative and inflation remained unchanged at 1.5%.

On the political front, we finally saw the German elections come to a close, with Angela Merkel marginally wining her fourth term as chancellor. Marked as the worst election for the CDU party since the 1950’s, Angela Merkel faces a number of challenges ahead to form a strong Government. Firstly, Mrs Merkel will need to form a coalition Government with the Greens and the liberal Free Democrats party (FDP), the negotiations for which could lead in to next year. Secondly, she will need to overcome the differences within her own block between the Christian Democratic Union party (CDU) and their long term allies the Christian Social Union (CSU) on potential upper limits on migrant numbers. Merkel’s reluctance about placing limits on refugees in the past has been one factor cited for her losing votes to the extreme far right party - alternative for Germany (AfD).

French president Emmanuel Macron also scored an important victory last month by signing the new labour reform bill. The bill is designed to cap severance payments and make it easier for companies to lay off and hire workers and in turn should improve overall competitiveness in the labour market and increase growth over the medium to long term. The controversial bill was expected to see mass street protests during the Summer, though in fact, only the hardline General Confederation of Labour union called for a strike in September, describing the bill as a ‘Declaration of war’. French law makes it mandatory for the government to consult all unions before reforming the labour market.

US

September in the US was a month of turbulence, both politically and meteorologically. Tensions between the US and North Korea continued to escalate after Pyongyang claimed to have tested a hydrogen bomb, and after a second ICBM test that weapons experts said could even bring New York within striking range of North Korean missiles. North Korea accused the US of declaring war, following an inflammatory tweet by President Trump.

The Graham-Cassidy bill, the last GOP healthcare bill (for the foreseeable future, at least), failed to get through the Senate. In fact, this fourth Obamacare repeal bill did not even make it to the vote, being withdrawn a few days before the 30th September deadline. The bill, which had seemed to be gathering momentum, ultimately fell in the same way as its predecessors as Republican Senators baulked at the prospect of reforming US healthcare in such a haphazard process, especially given the proposals to reduce Medicaid cover and remove protection for people with pre-existing conditions.

Elsewhere, a succession of bad weather events devastated the US’s Caribbean neighbours and did substantial damage to various areas of the US mainland, particularly Florida, Texas and Southern Georgia. Hurricanes Harvey and Irma did however bring a bonus for shares in the automotive sector as consumers in hurricane-hit parts of the country, particularly Southeast Texas, rushed to replace flood-damaged cars. Both retail and fleet sales leapt in September, providing car manufacturers with their first monthly sales gain this year, though this was from a depressed level in August when the hurricanes were being anticipated. Oil stocks also performed well as the oil price rose steadily during the first three weeks of the month with WTI crude climbing back above $50. Outside the automotive sector, consumer stocks were less favoured, with housewares faring poorly and food and drink stocks also losing close to 10% from their share prices. Overall, equities were positive, with the S&P 500 Index climbing 1.9% and the Dow Jones US Small Cap Index rising by 5.2% during the month.

Fixed income markets were weaker over the month, as a more hawkish tone from the Federal Reserve saw yields at the longer end rise by around 0.13%. Long-dated Treasuries returned -2.3% and their index-linked counterparts lost 1.3%. Corporate bonds were similarly lacklustre, with the exception of high yield bonds, which managed a positive return of 0.9% as investors continued to seek out any remaining opportunities for a positive return.

Wage growth is expected to reach 3.58% by the end of the third quarter. However, unemployment rose unexpectedly in August, from 4.3% the previous month. Inflation also exceeded expectations, rising to 1.9%, compared with 1.7% in July and forecasts of 1.8%, and retail sales dipped in August, falling 0.2% from their July level. It remains unclear whether the consumer is yet ready to join in the recovery and figures for September will be distorted by the unusual weather patterns seen during the month.


Source: US Census Bureau

On the foreign exchange markets, the Dollar lost 3.5% against a stronger Pound, which was boosted by talks of an early rate hike from the Bank of England. Against the Euro, it achieved a modest 0.8% gain.

At its September meeting, the Federal Reserve said that it would start to reduce the $4.5tr balance sheet that is the legacy of six years of quantitative easing. Some action on this issue had been widely expected, and did not cause undue concern, though it is worth noting that such actions in the past, have often resulted in recession: an outcome that the Fed will wish to avoid.

Asia Pacific and Emerging Markets

Japan

Japanese equities were sharply higher in September, with the TOPIX Total Return Index rising 4.3% in yen terms. The rally was led by more cyclical sectors with financials (+6.4%) and industrials (+5.5) outperforming more defensive sectors, for example healthcare (+3.0%). Toyota, Japan’s largest company, had a particularly strong month, rising 13% as part of a broader global rally in consumer cyclicals. Japanese equities continued to benefit from positive net flows with monthly inflows of $US 7.2bn into Japanese equity ETF’s, based on Morningstar figures. Year to date Japanese equity ETFs have experienced inflows of $US 42bn. It was a relatively sparse month for economic data, however year-on-year GDP growth came in below expectations at +2.5%. News later in the month was more positive with exports and industrial production rising more than anticipated. In monetary policy, the Bank of Japan left its policy settings unchanged, while lowering its inflation forecasts to 1.1% (from 1.4%) for the current fiscal year. The resignation of Japanese opposition leader, Renho Murata, appeared to leave the main opposition party in some disarray, and Prime Minister Shinzo Abe called a snap election for 22nd October, seeking to capitalise on a rally in his previously sagging approval rating. Abe’s popularity had fallen as low as 20% in July, following a number of scandals, but rose to 50% after recent North Korean provocations and nuclear tests. Whilst the election is not a foregone conclusion, polls seem to suggest that Abe’s gamble could pay off.


Source: Morningstar

Emerging Markets

Emerging market equities were marginally positive in September, returning 0.4% in local currency terms. September saw reasonable dispersion in terms of country performance as India and Taiwan fell, by 1.3% and 1.9%, respectively, while Brazil (+4.9%) and Russia (+3.1%) rose. Taipei-based Hon Hai Precision Industry (also known as Foxconn), the largest assembler of Apple’s Iphones, fell around 10%, as investors were disappointed by Apple’s latest round of new products, and pre-orders for the Iphone 8 came in substantially lower than for its predecessors. Samsung appears to have benefited from the same event, rising 10.7%. Brazilian stock markets were buoyed by data showing that GDP has grown for the first time in almost three years, however ongoing corruption charges for President Michel Temer risk hampering much needed reforms and derailing market sentiment. Russia’s MICEX stock index was propelled higher by rising oil prices, with Brent Crude closing the month at $57.5, up from $52.4 at the end of August. In upcoming political news, China’s Communist Party is set to meet on October 18, for its 19th Party Congress, an event which will be closely watched by markets due to the anticipated transition of leadership from several members of the powerful Politburo to a new generation of leaders.

Disclaimer: FOR PROFESSIONAL USE ONLY.

This report was produced by Independent Strategic Research Ltd (“ISR”). The information contained in this report is for informational purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment. While ISR uses reasonable efforts to obtain information from sources which it believes to be reliable, ISR makes no representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are provided by ISR for professional clients only and are subject to change without notice. You must in any event conduct your own due diligence and investigations rather than relying on any of the information in the report. All figures shown are bid to bid, with income reinvested. As model returns are calculated using the oldest possible share class, based on a monthly rebalancing frequency and all income being reinvested, real portfolio performance may vary from model performance. Portfolio performance histories incorporate longest share class histories but are either removed or substituted to ensure the integrity of the performance profile is met. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance.

ISR and Independent Strategic Research are trading names of Independent Strategic Research Ltd, registered in England and Wales No. 09061794. Registered office: 34 Southwark Bridge Road, London, SE1 9EU, UK.

August 2017 – Market Commentary

August is a traditionally quiet month in terms of news, with many market participants absent. Last month saw broadly neutral returns from equities. Bond markets were able to offer positive returns, in light of relatively benign economic data. The major themes of Brexit and US/North Korea were largely ignored by investors. The Jackson Hole Economic Conference produced no headlines and, thus far, the forthcoming German election looks set to go in favour of the incumbent Christian Democrat party. Japanese economic data exceeded expectations and inflation achieved a small, but welcome, tick upwards, offering hope that Abenomics is indeed starting to work. UK

August saw little progress in the UK’s Brexit negotiations with the European Union, with the same sticking points of the free movement of people and the ‘divorce bill’ being rehashed in the press on a daily basis. These points are reported to be holding up the very substantial talks that will be needed to work out the fine detail of what the relationship will eventually look like and it seems the longer the current posturing continues, the more speculation about a ‘hard’ Brexit will be heard.

July’s inflation figure remained stuck at the 2.6% figure that it had fallen to in June, and with retail sales continuing at a subdued 0.3% in July, and June’s data showing just 2.1% wage growth, there is still little to suggest that the British consumer is ready to join in the recovery. Consumer confidence, represented by the GfK Consumer Sentiment Index, which has averaged -8.96 over nearly four decades, stands at -10: a little above its recent low of -12, but still looking very sickly in comparison with the level of -1 a year ago. The Index measures households' expectations over the next 12 months regarding their personal finances and the economic situation. By contrast, the CBI Business Optimism Index stands at +5, compared with +1 during the second quarter, and against a long-run average of 3.4. Low unemployment has yet to lead to significant wage inflation, and industrial production is trending upwards from its low in April of this year, hence there is little reason for gloom in the corporate sector. With the Pound weakening by upwards of 2% against all major currencies, the outlook for Britain’s large-cap exporters continues to be relatively benign.

Investment markets were typically quiet during August, with few outstanding features. The FTSE 100 Index recorded a gain of just 0.8%, ending the month at 7430, despite reaching 7531 early in August, less than 20 points below its all-time closing high. Miners were the best performing sector, driven by improving forecasts and increased production, whilst technology was the major laggard as profit-taking continued in a sector that was at the forefront of global equity market performance during the first half of the year. There were few individual stock stories of note, but Provident Financial, the FTSE 100 doorstep lender, saw its shares fall by a further 57% over the month, after a second profit warning saw a one-day fall of 66%. The shares had already fallen by 15% in July, on the first indication that their move towards app-driven lending and re-organisation of doorstep collections was running into problems.

UK fixed income markets performed well, with conventional gilts returning +1.9% overall and up to +3.4% at the longer end. Corporate bonds gave a slightly lower +1.3%, with high-yield bonds offering only +0.7%. Index-linked gilts also rebounded, giving a +4.7% return overall, with +6.1% from the over-fifteen-year stocks. Across the curve, yields softened on comments from Mark Carney suggesting that a rise in the base rate is unlikely this year, reversing comments made earlier in the year.

Europe

European equities declined during August with the Euro Stoxx 600 Index down 0.45%. Economic data remained robust, but the strength of the Euro during the month presented a headwind for shares. The biggest laggard was Spanish equities, where the IBEX was down 1.93%. This was due, in large measure, to the terrorist attacks in Barcelona and Cambrils.

Looking at this in more detail, Eurozone GDP growth came in at +0.6% in the second quarter, up from 0.5% in the first quarter. This was supported by faster expansion from the likes of Spain, Netherlands and Austria, whereas France was unchanged and Germany slowed. In terms of business conditions, the manufacturing PMI index rose to 57.4 in August from 56.6 in July, suggesting ongoing growth momentum boosted by domestic demand and rising new export orders. However, the services PMI continued to slow due to fewer jobs being created and a pickup in input and output prices. Inflation over the last month had picked up to higher than expected 1.5% from 1.3% in July.

Overall the region continues to show signs of stable growth with the recent Economic Sentiment Indicator increasing to 111.9, its highest level since July 2007.

Given the stronger data, investors were also looking ahead to the ECB’s policy meeting in September, where market participants are looking out for any signals on the tapering of the quantitative easing programme. It had been thought that some clue might be given by Mario Draghi’s speech at the Jackson Hole conference, but this turned out not to be the case.

Within the equity market, the top performing sectors were transportation, utilities and mining, underlining the broad economic recovery. However, the poorer performing sectors were mostly consumer-facing: Food retail, media, financial services and leisure, adding weight to the idea that the consumer is proving to be a drag on the recovery. Retail sales reported in July saw a month-on-month fall of 0.3%. Fixed income markets remained buoyant with sovereign bonds returning +0.8% and investment-grade corporate bonds giving +0.6%, as the market anticipated no early increase in interest rates. August also saw campaigning begin in earnest for the German elections in September. Following the 2013 election, the 631-member Bundestag is governed by a coalition led by Angela Merkel’s Christian Democrats (311 seats) and the Social Democrats (193 seats). The opposition comprises the Greens and The Left Party. All signs point to a comfortable win for Angela Merkel, who is personally popular, and polling well ahead of Martin Schultz, the SDP leader, at present. There is a possibility that the CDU may end up in coalition with one or more of the other parties, but the expectation overall is for no change. The nationalist AfD has a widespread but small support base, and the best outcome that they could hope for would be to form the main opposition party, though this is just one of many possible outcomes.

US

The Jackson Hole conference, billed as the event to watch in August, turned out to be the proverbial damp squib. Paul Mortimer-Lee, Chief Market Economist at BNP Paribas summed up the proceedings, saying “It looked as if ECB President Draghi and Fed Chair Yellen had competed to see who could produce the speech least relevant to monetary policy. We call it a 0-0 draw” (http://blogs.marketwatch.com/capitolreport/2017/08/25/jackson-hole-fedconference-live-blog-yellen-draghi-on-tap/). Instead, most media attention during the month was centred around the continuing escalation of tensions between the US and North Korea. Despite this, investment markets remained largely unmoved during the summer period. The S&P 500 Index managed a rise of 0.1%, whilst smaller companies, as measured by the Dow Jones Small Cap Index, were a little weaker, falling by 1.1%. A Bank of America survey, published mid-month, suggested that only 33% of money managers expect corporate profits to improve from here, compared with a figure of 58% in the same survey at the start of 2017, and we have seen in recent weeks how the broadly-based market uptrend has been accompanied by savage markdowns for companies that disappoint even slightly in their earnings. In July, O’Reilly Automotive fell by 20% on announcing sales growth of just 1.7% versus expectations of 3-5%, and in early August, travel group Priceline had its shares marked down by 8% after it reported second quarter gross bookings of $20.8bn, versus expectations of $21.05bn.

The same Bank of America survey saw a record 46% of managers expressing the view that equity markets are overvalued, although positioning among US managers still seems to be pro-risk, and the S&P 500 Index is still trading just above 21 times trailing 12-month earnings – around 23% above the ten-year average.

President Trump’s handling of the North Korean crisis has been criticised for his attempts to use economic measures to exert influence on other Asian nations, particularly China, threatening to cut off trade with any country that does business with North Korea. Previous Presidents have managed to separate security issues from trade issues and co-operate on the one, whilst competing on the other. Mr Trump’s determination to link the two is a departure from historical US policy and it is unclear how the US stands to benefit from it, given that more than a quarter of US exports go to Asia.

Meanwhile, economic data points to a continuing recovery in the US, with inflation rising from 1.6% in June to 1.7% in July, and retail sales exceeded forecasts of +0.4%, with a reported figure of +0.6% in July: an increase on June’s figure of +0.3%. Industrial production also pushed further ahead in July, with a year-on-year increase of 2.2%, compared with 2.1% in the previous two months. August also saw significant increases in both consumer and business confidence, with the former rising from 63.4 to 96.8 and the latter from 56.3 to 58.8. The retail sales data saw a short-term rally in the Dollar, leading to rekindled speculation about further Fed rate rises this year. However, over the month the US currency weakened against both the Yen and the Euro.

Fixed income stocks all offered positive returns over the month, with long-dated conventional Treasury bonds gaining 3.4% and their index-linked counterparts rising by 3.3%. Investment-grade corporate bonds rose by 0.8%, whilst high-yield bonds managed a small gain of 0.2%.

Asia Pacific and Emerging Markets

Japan


Japanese equities were flat in August and broadly in-line with other developed markets. Negative returns were realised in the financials sector which fell 3.9%, led by Mitsubishi UFJ Financial (down 4.9%). Positive performance was generated by the industrials and consumer goods sectors. Keyence Corporation, one of Japan’s largest technology companies, was particularly strong, with returns of 12.2% in August following positive financial results released in late July. Economic news was mostly positive with GDP rising 1.0% (quarter on quarter), the strongest result in two years. In addition, industrial production rose 2.2% over the past month (vs. 1.6% expected) and inflation increased to 0.5% year on year. In political news, Prime Minister Abe appeared to recover somewhat from a series of scandals over the past few months which have called into question the stability of the Abe Government and implementation of the “Abenomics” economic reform agenda. Following a cabinet reshuffle in late July which brought in a new team of ministers, Abe’s approval ratings have ticked up and the Liberal Democratic Party backed candidate achieved a solid victory in the Ibaraki prefecture election.

Emerging Markets

Emerging market equities were positive, yet again in August, returning 2.1% in local currency terms, compared to flat returns in developed markets. Emerging market equities continued to experience positive inflows. August saw a lessening of the influence of emerging tech giants in aggregate market returns and broader market participation from other sectors, notably financials, with ICBC, the world’s largest bank by assets, rising 7.1% in RMB terms, and China Construction Bank, the world’s second largest, rising 3.7%. Larger capitalisation companies slightly outpaced smaller and mid-size companies. Among specific countries, Russia and Brazil were the stand out performers with the MICEX (Russia) and BOVESPA (Brazil) indices returning 4.8% and 7.5%, respectively, in local currency terms. Both markets were supported by their largest constituents with Sberbank (Russia’s largest bank) up 11.5% following strong profit results and Vale (the world’s largest producer of iron ore) up 11.7% in-line with rising iron ore prices. South Korea was the laggard with the KOSPI falling 2% in Won terms as political tensions weighed on market sentiment following Trump’s promise to meet any North Korean threat to the US with “fire and fury”.

Disclaimer: FOR PROFESSIONAL USE ONLY.

This report was produced by Independent Strategic Research Ltd (“ISR”). The information contained in this report is for informational purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment. While ISR uses reasonable efforts to obtain information from sources which it believes to be reliable, ISR makes no representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are provided by ISR for professional clients only and are subject to change without notice. You must in any event conduct your own due diligence and investigations rather than relying on any of the information in the report. All figures shown are bid to bid, with income reinvested. As model returns are calculated using the oldest possible share class, based on a monthly rebalancing frequency and all income being reinvested, real portfolio performance may vary from model performance. Portfolio performance histories incorporate longest share class histories but are either removed or substituted to ensure the integrity of the performance profile is met. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. ISR and Independent Strategic Research are trading names of Independent Strategic Research Ltd, registered in England and Wales No. 09061794. Registered office: 34 Southwark Bridge Road, London, SE1 9EU, UK.

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