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The FTSE 100 is called to open 8 points higher at 7424. Asian stocks advanced on optimism that the U.S. and China will declare another truce in their trade war at a presidential meeting on Saturday. The yen extended losses after the biggest drop since April. Equity benchmarks in Tokyo, Seoul and Hong Kong saw gains of almost 1%, and U.S. stock futures also climbed after reports that the current plan is for the U.S. to hold fire on hiking tariffs on another swathe of Chinese imports.
At its recent Annual General Meeting, JP Morgan American Trust voted to approve changes to its investment process. The trust will move towards a more concentrated, active approach, and ultimately a somewhat higher risk approach. This is part of a wider trend we are seeing across active management; fund and trust managers are increasingly moving towards higher conviction portfolios in an effort to differentiate themselves from passive offerings.
Following a recent research trip to the US, Nick Wood and Ernst Knacke caught up with Seb Scott to discuss their key findings from the trip and how US equity managers saw things from the other side of the Atlantic.
In line with the beliefs of Benjamin Graham, David Dodd and Warren Buffet, many argue that you have to take advantage of the ‘value premium’ (where the market ignores opportunities in cheap stocks) in order to generate strong returns. Indeed historically, over a long-term period one can see evidence of value stocks outperforming growth stocks.
After the strong start to the year, renewed trade tensions and weaker manufacturing data saw profittaking in May as investors adopted a more cautious stance. The FTSE 100 fell 257 (3%) to 7,161 while Europe ex UK was down 5% in local currency terms, Wall Street 6% and Japan 7%. However, sterling weakness against the dollar – a 3% decline to $1.26 – and the euro and Japanese yen helped cushion losses for UK-based investors. In contrast, bonds appreciated significantly as manufacturing data suggested an increasing risk of recession and earlier than anticipated US interest rate cuts. The US Treasury yield curve again mildly inverted leaving the 10 year yield at 2.1% – below the 2.4% effective rate on Federal funds – while the eurozone and Japanese bond investors continue to face negative yields. The UK 10 year gilt yield closed at a two year low of 0.86% while rising breakeven rates on longer duration index-linked gilts gave a 4% return in May (almost 9% year-to-date). Higher oil inventories resulted in a sharp correction in Brent crude to $64 a barrel. Gold benefitted from unpredictable policy decision-making with the sterling price rising over 5%.
Major stock markets gained between 2% and 4% in April. Better than expected economic news and firstquarter corporate results helped Wall Street to a new all-time high. Returns for sterling-based investors were boosted by the dollar strengthening to $1.29 as the delayed Brexit timetable prompted speculators to close short positions. The FTSE 100 rose 139 points to 7,418, lagging global markets as well as small and mid-sized UK stocks. The oil price was squeezed higher as the US ended sanction waivers on eight major purchasers of Iranian oil.
After a turbulent end to 2018, global equity markets recovered most of their losses in Q1 as the US and China appeared close to a bilateral trade agreement and the Federal Reserve indicated that it would, if necessary, delay normalising monetary policy to avoid recession. The FTSE100 rose 551 to 7,279 - a total return (including dividends) of 8% over the quarter. The broad-based US indices gained 13% in local currency terms - marginally higher than the 12% return on European equities. Japan, Asia and emerging markets lagged at around 6%. For UK investors, sterling’s modest rally to $1.31 depressed international returns by 2%. Global bonds were the major surprise as slower growth prompted a sharp fall in yields and a flattening curve. The German bund yield turned negative again while the decline in yields on 10 year UK Treasuries to 1% meant conventional gilts returned 3% and longer duration index-linked 7%. OPEC’s continuing supply discipline saw Brent crude rise from $54 to $68.
Markets traded broadly sideways over February, with January having already seen a rebound from fourth quarter lows. European equities were the strongest performers rising 3.8%, just ahead of the 3% gain in the US and Japanese markets. Asia and emerging markets lagged other areas, the latter being down 0.7% over the month.
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