Chief Investment Strategist
Market Overview, Alan McIntosh
Global equities continued to advance last week as positive news kept investor sentiment “risk-on.” US stocks have had their best start to the year since 1991 and are now only 4% away from the all-time high reached last October. So, what’s fuelling the appetite for shares again? The two main concerns for markets in 2018 were firstly, fears that the US central bank, the Federal Reserve, would overtighten on monetary policy as it pursued its aim of normalising interest rates away from the artificially low levels set in the aftermath of the financial crisis. Secondly, intensification of the trade dispute between the US and China made investors worry about a slowdown in global trade triggered by the introduction of tit-for-tat tariffs on a broad range of imported goods. Weaker economic data and a sharp sell-off in markets late last year triggered a U-turn on monetary policy as Fed Chair Jerome Powell said that the bank would be patient in its future assessment of policy changes. Meanwhile, high level talks between the US and China have given markets hope that a resolution on the trade issue could well be imminent. Hence the recovery in stock markets.
In the UK, investor sentiment has also turned more favourably towards stocks, particularly mid-cap and more domestically focused names. As the fears of a “hard Brexit” recede, so the potential damage to the UK economy is seen to lessen. Thus the perceived “Brexit discount” accorded to some parts of the market is seen as an investment opportunity. Care, however, must be taken to distinguish between sectors that are genuinely challenged such as high street retailers (which arguably deserve to trade at a discount), and other parts of the market that are just suffering through global investors’ indifference towards UK assets. Nevertheless, the income gap between UK shares and government bonds is at multi-decade highs. A prospective dividend yield of 4.6% on the FTSE 100 compares with a redemption yield of 1.3% on a 10-year gilt. This seems too extreme.
Economic Overview, Richard Carter
The global economy continued to show signs of a moderation last week but nothing that suggests any major cause for alarm. In fact, US fourth quarter GDP growth was better than expected at 2.6% annualized thanks to strong domestic consumption and healthy business investment. There are still concerns over the global manufacturing sector though amid trade disputes and ongoing challenges in the auto industry. These issues seem to be affecting the Eurozone more than most as judged by the latest PMI which was stuck in contraction mode. The manufacturing ISM in the US also fell following a drop in new orders but at 54.2 remains at a reasonably firm level overall.
Going forward, the outlook for the global economy depends partly on the US-China trade talks and the headlines currently suggest real grounds for optimism. A deal may be finalised on the 27th March between President Xi and President Trump provided there are no last minute hitches.
In the UK, the economic data remains very mixed and influenced by the ongoing Brexit saga. The latest manufacturing and construction PMIs were both soft but this was hardly a shock and at least the public finances continue to improve. There was little movement over the weekend so the meaningful vote seems likely to happen on the 12th March with an extension to Article 50 being the current favourite. Otherwise, this week will see the release of various service sector PMIs and US nonfarm payrolls.
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.
Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.