Commentary on June 2018

Market Overview

With political headlines dominating economics, bonds and shares in Europe and the UK ended June broadly unchanged; US indices ended higher, although this was largely attributed to a few large tech companies. On the flip-side, emerging markets continued their slide lower, suffering at the hands of the strong dollar and ongoing trade tantrums; shares fell by 3-4% and are now around 12% off their mid-April highs.

The Trump Twitter feed had another busy month, announcing a successful summit with Kim Jong-un, a planned summit with President Putin, tariffs on Chinese imports and the threat of further tariffs on Chinese and European imports, not to forget the retraction of some previously-announced measures against China.

In America, the US Federal Reserve raised rates by 0.25%, as expected, commenting that economic growth, both in the consumer and business sectors, was solid. Business investment continued to grow strongly but, for the first time, members of the Federal Reserve said that they were hearing of businesses deferring vital investment decisions because of worries about a possible trade war; this could cause them to question the economic outlook.

The European Central Bank announced an end to quantitative easing (QE), effective from the end of December. Master conjurer, Mario Draghi, portrayed this as a ‘dovish’ move re-assuring investors that no interest rate rises should be expected before next autumn. The Bank of England’s Monetary Policy Committee voted by 6-3 to keep interest rates at 0.5%, but an additional member voting in favour of higher rates took investors by surprise.

Theresa May offered a new Brexit plan that essentially meant paying a lot of money to remain part of the EU, with a few opt-outs but with no powers to influence future policy that would still govern us. At the time of writing this has produced two ministerial, and several less prominent, resignations.

Our Views

There are many well-documented concerns for investors but, just for now, it feels like we’re in the midst of a summer lull. The politics are noisy but provide little substance that can be priced by markets. Economic data is generally showing steady growth accompanied by a slight rise in inflation; there’s much debate about what will cause this growth cycle to end and when, but for now most market participants are more than a bit distracted by the football!

With an uneasy calm descended over European politics (for now) the key concerns have been the escalation of President Trump’s trade rhetoric and the ongoing Brexit debacle. These are both potentially market-movers but, for now, lack sufficient hard facts to base market valuations on. Concerns are growing that the US-China game of tariff poker could seriously slow growth (largely through a postponement of business investment) long before the measures are implemented. These concerns have been echoed by members of the US Federal Reserve, who may face the dilemma of whether to continue raising interest rates to tackle tariff-driven inflation or ease off to cushion an abrupt end to the growth cycle.

Manufacturing and service data in the UK have improved on a poor start to the year, and the economy has probably received a football-led boost to consumer spending. Whilst always using Brexit as his caveat, Bank of England Governor, Mark Carney’s on/off forward guidance has returned to hinting at an August rise in interest rates. We wouldn’t be surprised and don’t see that upsetting markets. There may be a short period of Brexit shenanigans ahead of the summer recess, but Theresa May is likely to survive for now, if only because no-one else fancies accepting the poisoned chalice.

How are we currently positioned?

We made no changes to the portfolios during June.

Against a more uncertain back drop, we are happy to maintain a strategy of continuing to avoid the political noise as far as possible, seek out less crowded lower risk areas and focus on fundamental value.

We remain under-weight fixed interest bond funds, preferring a combination of equities, property and alternative investment funds.

Having used the recent recovery to reduce risk, for the time being, we are happy to hold some cash to redeploy as opportunities present themselves.