A new era where politics matter more than central bankers
Trump euphoria peaked around the middle of January, with leading stock market indices in the UK and US making new highs. Investors initially took heart at the pace and determination of the President to enact his campaign promises, but the feeling grew that current valuations were discounting too much good news. We entered an era where politics mattered more to markets than central bankers, with individual share prices "flash-crashing" on negative Twitter comments by the US President.
Euphoria fades as investors question valuations
Trump euphoria peaked around the middle of the month with leading stock market indices in the UK and US making new highs. Initially investors took heart at the pace and determination of the President to enact his campaign promises, but the feeling grew that perhaps current valuations were discounting too much good news.
In sterling terms, most major stock markets ended the month flat, though there were gains in Japan (+1.8%) and Asia (+4%). Government bonds fell by around 2%, though the positive economic backdrop produced small gains for high-yield bonds.
Bank of England upgrades growth while factory input costs surge
Little excitement came from the monthly round of central bank meetings, the exception being the Bank of England raising its growth forecast for 2017 to 2%. There was no change to the inflation forecast, although it transpired that some members were getting twitchy about the possible follow-through of factory input prices, now rising at an annual rate of over 15%.
As Theresa May moved closer to triggering Article 50, now with parliament's approval, Governor of the Bank of England, Mark Carney, told the Treasury Select Committee that Brexit was no longer the biggest risk to UK financial stability. Meanwhile, government bond yields of peripheral European countries, and France, rose on political concerns.
Twitter, trade wars and a rabbit in the spring
We entered an era where politics mattered more to markets than central bankers. Witness the fall in the US dollar, and consequent rise in the Euro, as Trump came close to accusing Germany of manipulating its currency. Individual share prices had "flash-crashed" on negative Twitter comments by the US President, and sterling, along with UK companies exposed to overseas markets, rose and fell on the latest Brexit-related headlines.
Whilst President Trump had been more active than a rabbit in the spring, many of his early edicts had been picking fights rather than stimulating growth. We would feel more comfortable if he replaced the protectionist rhetoric with firm plans for a fiscal stimulus.
The European Central Bank was mandated to target inflation at "below, or close to, 2%". With EU inflation running at 1.8%, the debate over the need to change monetary policy was likely to heat up, especially from the German end. If the traditional ECB stubbornness saw no change in policy, then bond vigilantes might take it on themselves to send yields higher on bonds with longer maturities.
Better than feared, but a squeeze is coming either way
Back in the UK, even the Governor of the Bank of England had to begrudgingly acknowledge that things were far better than his pre-referendum scare-mongering. However, this change of view was unlikely to be reflected in a rise in interest rates anytime soon. The Bank's view was that they ran a fine line between keeping inflation in check and killing off a fragile recovery, and the current inclination was to "look through" short-term inflation, that is, leave rates alone.
The question was whether imported price rises would feed through to shops and services. If they did not, that would represent a squeeze on corporate margins and profits. If they did, that would squeeze a consumer sector already funding spending from savings and borrowings. Either way, it did not paint too bright a picture.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Too many uncertainties to feel confident in long-term projections
We remained concerned that whilst global economic growth might be improving, a lot of good news had already been priced into investment markets. There were too many uncertainties over Brexit negotiations, European politics, trade wars and the daily Twitter messages of the US President to feel confident in any long-term projections.
Meanwhile, back in the UK, the question was whether imported price rises would feed through to shops and services. If they did not, that would represent a squeeze on corporate margins and profits. If they did, that would squeeze a consumer sector already funding spending from savings and borrowings. Either way, it did not paint too bright a picture.
Whilst President Trump has been more active than a rabbit in the spring, many of his early edicts have been picking fights rather than stimulating growth.
We made several changes during January, adding an extra absolute return fund, taking some risk off the table, and reducing our underweight position in bonds on the most cautious portfolios.
Added an extra absolute return fund
We added an extra absolute return fund across the portfolios, switching part of Standard Life GARS and Invesco Targeted Return funds into the Old Mutual UK Specialist Equity fund.
Took risk off the table on the rally
The recent rally gave us the opportunity to take a bit of risk off the table on our cautious-balanced portfolios, switching small amounts of the UK, US and Japan into a money fund.
Reduced our bond underweight on cautious portfolios
Our target was reached to slightly reduce our large underweight position in bonds on our most cautious portfolios. We re-invested in the Legal & General All Stocks Gilt Fund. We still preferred equities to bonds over the longer term, but felt that in the near term there was a risk that markets had overshot and that a correction in equities could send bond yields lower.
Diversified and ready for a volatile year
Greater uncertainty over wider geopolitical issues and a global mountain of debt meant that we anticipated an interesting and possibly volatile year ahead. Events the previous year had highlighted the benefits of holding a robust, diversified portfolio over the costs of taking bets on major outcomes. We maintained our diversified portfolios with the capacity to take advantage of opportunities when they became available.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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