used to be a time when the market would jitter at the slightest bad news story.
Nowadays it seems that record breaking storms and a war of words amongst
leaders with mass devastation at their fingertips can’t shake the nerves of
is not to say that markets have been driving forward (the FTSE 100 is, at the
time of writing, where it was in the middle of January) but rather there hasn’t
been the volatility we have seen in recent years.
Covering the Month of August
- The UK equity market closed the month marginally higher, despite
significant volatility in response to global geopolitical developments.
- Economic data indicated that UK GDP growth slowed to just 0.3% in
the second quarter as continued weakness in sterling and Brexit uncertainty
hit household spending and business investment.
- UK retail sales rose 0.3% in July, marginally ahead of
expectations, supported by strong food sales.
- Non-standard lender Provident Financial announced its second profit
warning in two months in an unscheduled trading update to the market.
Given the circumstances, chief
executive Peter Crook took the decision to resign with immediate effect.
The company board determined that Provident Financial must protect its
capital base by withdrawing its interim dividend declared on 25th
July 2017 and indicated that a full-year dividend is ‘unlikely’. Into
month-end, the group’s share price showed some recovery from the initial
dramatic fall, albeit from a low base.
- Despite geopolitical tensions, the struggles of the Trump
administration, another terror attack in Europe and Tropical Storm Harvey,
the US equity market ended August in positive territory.
- While the month started off strongly, with the market touching a
fresh record high on 8th August, US equities remained under pressure for
much of the month.
- On 17th August the US equity market recorded its biggest
one-day fall since May as the North Korea stand-off and Charlottesville
violence were followed by the disbanding of the US administration’s
business councils and simmering concerns over stretched valuations.
- The US equity market remained unsettled as concerns around growing
political risk dominated. Investors rushed to so-called ‘safe-haven’
assets after North Korea launched a ballistic missile that flew over Japan
and President Trump responded by saying that “all options are on the
- By the end of the month, though, it was Tropical Storm Harvey
(initially a hurricane) which had the biggest impact on the US equity
market as it battered the US Gulf coast with historically heavy rain.
- Energy was the worst performing sector as much of the drilling and
refining activity in the area came to a halt. Financials were also
negatively impacted, particularly insurance stocks, as concerns grew that
flooding from Harvey would lead to big losses. Consumer discretionary
stocks, particularly retailers, were also in negative territory, showing
the pressure that online retailing is putting on bricks and mortar
- In contrast, the IT sector continued
to rally, helped by investor enthusiasm ahead of the launch of Apple’s new
iPhone, and utilities gained from their perceived ‘safe-haven’ status.
- By the end of the month, markets appeared to take courage from a
larger-than-expected revision to GDP growth. Data showed that the US
economy expanded at an annualised rate of 3% from April to June (revised
from an initial estimate of 2.6%) – the strongest growth in two years as
household spending and investment improved.
- European equity markets ticked down in local currency terms, but
rose in sterling terms as the Euro continued its upward move in August.
Relative to the British pound, the Euro climbed to the highest level in
eight years, while versus the US dollar, the Euro crossed the 1.20 threshold
this month for the first time since January 2015.
- On a sector level, the utilities sector was the strongest performer
in August, bolstered by a surge in European power prices. This was
followed by the health care and consumer goods sectors. Meanwhile,
consumer services led detractors relative to the overall market, followed
- On the macroeconomic front, GDP figures showed the European economy
gathering more pace in the second quarter. Eurozone GDP growth stood at
0.6% in quarter two, up from 0.5% in the first quarter.
- Particularly remarkable was the broad-based nature of the upswing,
which is finally starting to spread across the 19-nation region. Germany,
the Euro area’s largest economy, is no longer the sole catalyst behind this
recovery, but other European countries are also making a notable
- GDP data from the second quarter 2017 showed Spain growing at its
strongest pace in almost two years. Exports and investment have led France
to its strongest continuous GDP expansion since 2011, while the
Netherlands posted the fastest GDP growth since the end of 2007. Moreover,
Italy, a country that has lagged the pickup of its peers, is now showing
encouraging signs and is expected to grow GDP by over 1% this year for the
first time since 2010.
ASIA & EMERGING MARKETS
- Asian equity markets ended the month higher for an eighth
consecutive month, all the more impressive given the increase in
geopolitical tensions on the Korean peninsula.
- China’s equity market outperformed, thanks to generally better than
expected corporate earnings and further signs of resilience in the
- Hong Kong’s equity market also made solid gains led by property and
bank stocks after better than expected earnings.
- Thailand’s equity market enjoyed its best monthly return
year-to-date, with GDP growth in the second quarter beating expectations,
while exports growth also surprised positively, although an absence of
investment spending remains a concern. Malaysia’s second quarter GDP growth
also beat expectations and the current account surplus was sustained.
- On the other hand, the Philippines and South Korea were the
region’s worst performing equity markets over the month.
- In quarter two India’s GDP growth slowed to 5.7% from 6.1% in the prior
quarter, which was weaker than had been expected.
was another positive month for emerging equity markets as they extended
- Latin America led the gains, drawing support from stronger than
expected economic releases, positive political developments and a
continued improvement in commodity prices. Equity markets in EMEA (Europe,
Middle East and Africa) also enjoyed stellar gains with Russia, Hungary
and Poland being the country winners.
- Emerging market currencies gained in value versus the US dollar as
expectations of a possible US interest rate hike in September receded
significantly following the release of a subdued US inflation report in
- From a sector perspective, financials, materials and healthcare
came out on top.
- Japan’s equity market ended the month marginally weaker in local
currency terms due to tension between the US and North Korea and ongoing
political uncertainty in the US.
- Overseas risks offset tailwinds such as solid corporate earnings
momentum and a strong domestic economy.
- At the start of the month, geopolitical concerns surrounding the
Korean peninsula raised uncertainty and the level of market volatility.
This led the market to prefer so-called ‘safe haven’ assets. Government bonds
outperformed corporate bonds and investment grade outperformed high yield.
- The ECB sought to downplay expectations of a significant policy
change announcement. It was therefore not surprising that Draghi’s speech
contained nothing new.
- Of more immediate concern to the market is the US debt ceiling
debate. That is the debate surrounding legislation, which needs to be
passed so that the US Government can continue borrowing and not default.
Reflective of the market’s concerns, US Treasury Bills due to mature in
October 2017 (the expected deadline for the debt ceiling) are now trading
at much higher interest rates to bills maturing in the months after.
- Corporate bond issuance levels in the eurozone were unchanged
versus levels last month. However, there was a fall in sterling issuance,
which was also lower than a year earlier. This in part reflects the fact
that August 2016 sterling issuance was much higher following the Bank of
England’s announcement last year that it would buy sterling corporate
bonds as part of its Quantitative Easing programme.
ROUND UP FROM PRESENTATION BY JP MORGAN
VIEWS OF DR DAVID KELLY – CHIEF GLOBAL STRATEGIST
- Don’t let how you feel about politics influence the way you invest
- There is a need to recognise how good things have been. The next 5 years cannot be as good – sailing into a “headwind”
- The average balanced portfolio has returned +9% per annum over the last 10 years
- Expansion in the US continues to be slow and steady – now in its 99 month, but growth is on a lower trajectory
- US unemployment has fallen from 10% in 2009 to 4.4% which is basically full employment
- Wages haven’t risen – employers have had the power and trade unions have been squashed
- Inflation will tick up and central banks will gradually tighten
- US growth prospects likely to slow
- Dual impact of fiscal stimulus and raising interest rates has resulted, economically, in the foot being applied to the brake and the accelerator at the same time
- David thinks there may be an interest rate rise in the US before the end of the year, plus three rate rises next year
- Confidence is rising in the eurozone
- European consumer confidence is at its highest level since May 2007. Growth rate is picking up and David expects the ECB to start to taper Quantitative Easing in 2018
- Stocks look cheap compared to bonds
- UK growth may slow down going forward
- Sterling has depreciated in the last 10 years
- Inflation has picked up but wage growth has not
- David’s view is that interest rates will eventually rise but Bank of England may wait until Brexit negotiations are further ahead and the future path is clearer
- Emerging markets growth is leading to a brighter earnings outlook
- China numbers looking ok
- David feels that global growth will continue in 2018 – eurozone and emerging markets to lead the way
- High values in bonds and equities may limit future returns
- Geopolitical and other risks underscore the need for broad diversification
What do we think?
There used to be a time when the market would jitter at the slightest
bad news story. Nowadays it seems that record breaking storms and a war of
words amongst leaders with mass devastation at their fingertips can’t shake the
nerves of investors. Which is not to say that markets have been driving forward
(the FTSE 100 is, at the time of writing, where it was in the middle of
January) but rather there hasn’t been the volatility we have seen in recent
years. As the storm season reminds us, a lull is no cause for complacency.
There is a growing sense of optimism around the global economy, but that
doesn’t necessarily mean that investments will grow at the same time. Markets
tend to be priced on a prediction of what is to come and many economists think
that an economic upturn is already priced in to investments. Investments that
are typically considered as safer ones, focusing on income returns, have had a
good run as investors chase yield and pay more and more for the same income.
But we also hear many economists state that other investments that have been
unloved for years may be due their turn in the spotlight. We may be getting
back to a point where good active fund managers might deliver better value for
money than lower cost but less active managers.
Date of next meeting: 18th October 2017