Commentary on July 2018
A busy month where, once again, the lion’s share of headlines were taken by President Trump, witnessed strong corporate earnings pushing equity markets higher across the developed world. Over the course of the month, in sterling terms, American and European stock-markets gained over 4% whilst shares in the UK and Japan rose by just over 1%. A return to ‘risk on’ mentality also favoured many emerging markets and high-yield (junk) bonds.
There was no respite for the Trump Twitter feed, expressing opinions on NATO, Europe, China, Brexit and even the Federal Reserve’s interest rate policy. The ‘Trump does Europe’ road trip saw him threaten to pull the US out of NATO, castigate Theresa May for not following his advice on negotiating with Europe, negotiating poorly with Europe and confusing the word ‘wouldn’t’ with ‘would’!
In the UK, August’s meeting of the Bank of England’s Monetary Policy Committee saw an unexpected unanimous vote to raise interest rates to 0.75%; the subsequent statement signalled that, on current forecasts, further rises were likely to remain gradual but dependent on the outcome of Brexit negotiations. In follow-up interviews Governor Mark Carney warned that a ‘No deal’ Brexit was ‘highly undesirable’ but the chances of it were ‘uncomfortably high’.
The United States Federal Reserve offered a bullish assessment of the economy, referring to the strong jobs market and inflation close to their objective. The overall narrative was taken as a sign that interest rates would rise again in September, but investors continued to doubt the Fed’s commitment to raise rates a further three times next year.
At first glance the Bank of Japan meeting was as dull and predictable as usual-a downward revision of inflation forecast and a re-stated commitment to the asset-purchase programme. But hidden in the small print was a change of wording that would allow Japanese bond yields to rise further without intervention; this caused a small rise in most international bond yields.
July painted a rosy picture of economic and corporate life in America. The economy grew at an annualised rate of 4.1% in the second quarter and almost 90% of companies that had reported earnings beat expectations; earnings growth is around 20% which, to some extent, is justifying current valuations. And Apple beat Amazon in the race to (briefly) become the first US company with a $1trillion market value (this happened in early August).
There are, however, a few points which, though not necessarily negative, are worth noting in all this exuberance. Firstly, the growth rate (GDP) of 4.1% is only one quarter’s growth annualised-the rise over the past year is still a respectable 2.8%, but somewhat lower than the headline. Secondly, this growth figure was boosted by massive export orders of soybeans ahead of likely trade tariffs. The final point is that the rise in corporate earnings was down to Trump’s tax give-away; that whilst post-tax earnings beat forecasts the pre-tax numbers didn’t.
The move by the Bank of Japan was interesting. The ‘we’re not tightening’ had a touch of Draghi (President of the European Central Bank) about it although, to be fair, there has been no obvious tampering with the Yen 80 trillion monthly commitment. But by allowing bond yields to rise to 0.20% (from the previous barrier at 0.10%) there is an acknowledgement that volatility in bond markets is rising and that the Bank will be prepared to tolerate a small rise in yields and be more selective about when to take on market forces.
How are we currently positioned?
We made no changes to the portfolios during July.
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.