Commentary on April 2017

Market Overview

A build-up in geo-political concerns, together with some weaker economic data, caused investors to take some risk off the table. Stock-markets fell whilst fixed interest and gold found favour as safe havens. Stock-markets were around 3% lower going into Easter but closed the month off the worst levels. Europe rallied hard to finish the month slightly positive after the first round of French elections, but most markets ended 1-2% lower. UK fixed interest showed gains of around 1%, property slightly less.

Europe led stock-markets off the lows on relief that the final round in the French elections would see a Macron verses Le Pen contest, one which Macron, a Euro-enthusiast, was expected to win comfortably. The Euro rallied against other currencies and French and peripheral European bonds out-performed others on the belief that the Eurozone would remain intact.

Economic data remained mixed; the worst level of personal consumption since 2009 cut Q1 growth in the US to an annualised rate of just 0.7%, with a similar story in the UK prompting talk of an end to the consumer boom. Bremoaners were allowed their moment of schadenfreude as European growth usurped the UK; Q1 GDP of 0.5% compared favourably with the UK’s 0.3%, and Purchasing Managers’ data suggested a current growth rate of 0.7% with economic confidence hitting a six-year high.

Central bankers were less prominent, with no major moves and ‘steady as she goes’ type statements. The US Federal Reserve said nothing to dispel the likelihood of a rate rise in June, saying that the recent slowdown was temporary and that the fundamentals behind consumption growth remained intact (this appeared to be supported by the subsequent strong jobs data released in the first week of May). In Europe, Draghi conceded that recent data were encouraging but still felt that there were risks to the downside and was in no hurry to tighten monetary policy.

Our Views

Potential banana-skins come and go with little effect on valuations; this month saw the passing of French elections, aggressive posturing by nuclear states and a loose agreement to kick the US government’s debt-ceiling down the road to September. The VIX index (commonly known as the fear index) is at its lowest level since February 2007, prior to the Great Crash; this suggests that investors have little fear of an impending upset, despite record levels of debt and growing political concerns. This more likely reflects the complacent view that central banks won’t allow a serious crash.

There’s little to be gained by disputing claims of stronger growth ahead, although we note that this is currently more prevalent in the soft (survey) data than the actual data; if those with the most money believe it then they will continue to push markets higher. However, points to ponder include whether President Trump will deliver on his US growth promise (and whether that helps or hinders other nations), when will central banks feel obliged to withdraw their monetary support and how valuations will react to this, and how Brexit negotiations will affect growth in the UK and wider Europe.
What is less debatable is the record (and growing) level of global debt. Stories of consumers being squeezed by falling real incomes are increasing, ranging from default rates on car loans to a Canadian mortgage lender taking out a $2bn lifeline at punitive rates. This month saw set-backs in consumer spending in both the US and UK, the question is whether these were blips or the start of a something more significant.
On the flip-side there remains a need for income. Whilst cash offers no return then a bid will remain for assets with a regular income.

How are we currently positioned?

The strength in sterling reduced the value of our overseas funds, the exception being our European fund on the higher-risk accounts, which benefitted from a stronger Euro.

Although larger UK companies with overseas exposure fell over the month, smaller domestically-focussed companies showed gains of 2-4%. These are well represented in our income funds, in particular the Unicorn Income fund which gained over 7%.

A greater uncertainty over wider geopolitical issues and a global mountain of debt, mean that we anticipate an interesting and possibly volatile period ahead. Previous events have highlighted the benefits of holding a robust, diversified portfolio over the costs of taking bets on major outcomes. We’re maintaining diversified portfolios with the capacity to take advantage of opportunities when they become available.