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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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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