Trading floors across the world toast strong start to year
Markets have continued to push higher despite the lack of compelling economic data, with US indices reaching new all-time highs last week.
We find ourselves coming towards the end of April with markets having seen the strongest start to the year since 1987. Of the 29 US, UK and European indices that we track on a daily basis, 26 are up by at least 10%, with the lowest return (Norway) up 6%. The main S&P 500 Index in the US is up by almost 16%, while the FTSE 100 is up 12.28%. Both the MSCI Asia and Emerging Market indices are up over 10%. The major laggard globally is Japan, but the Topix Index is still up 6.5% so far this year.
The steep correction of the final quarter of 2018 feels like a long time ago; indeed, we have seen a rapid rebound in equities, all thanks to the change in tone from the central banks rather than a turnaround in the momentum of the economic data. The rebound in equities has not been echoed in government bond markets, with yields still close to record lows and in some cases negative territory.
This is obviously positive news for our model investment portfolios, the performance of which reflects the recent global market recovery.
US bullish as economy roars ahead
America’s economy roared ahead in the first three months of the year, confounding even the most optimistic expectations about its strength.
First-quarter gross domestic product grew by 3.2 per cent annualised, the commerce department said, the strongest first quarter since 2015. The US economy grew by 2.9 per cent last year, including growth of 4.2 per cent in the second quarter, compared with 2017. It has not grown at 3 per cent or more in a full year since 2005, when it expanded by 3.3 per cent under President George W Bush.
GDP is the value of all goods and services produced in an economy and its growth is an important indicator of its health. The United States is the world’s largest economy and its economic strength influences that of Britain and other nations.
On the back of this news (Friday 26 April), the S&P 500 and the technology-biased Nasdaq index closed at record highs for the second time this week. The S&P 500 rose 13.71 points, or 0.5 per cent, to 2,939.88, for a weekly gain of 1.2 per cent, while the Nasdaq was up 27.72 points, 0.3 per cent, at 8,146.40, a rise of 1.9 per cent over the five days.
However, despite the positive headlines, some economists have cautioned that there was weakness underlying the headline number. Concerns earlier this year about slower economic growth, the outlook for corporate earnings and the US-China trade war appear to have dissipated, but the risks remain real.
We therefore remain cautious, whilst maintaining our globally diversified investment portfolios, with a proportionate exposure to the US.
UK stocks are not feeling the love
Despite the recent global stock market recovery, the UK is relatively unloved. The latest Bank of America Merrill Lynch study of fund managers found that 28 per cent of them had an allocation of UK stocks lower than would be expected considering the UK’s rank in a global investment index.
The stock market has underperformed since June 2016 because of the uncertainty over Brexit. Investors are being put off by gloomy growth forecasts, the continued uncertainty surrounding Brexit and the political turmoil in the UK.
Those people prepared to go against the tide and invest in UK stocks, however, are being rewarded with juicy dividends. The yield on the FTSE 100 index of leading stocks is now 4.5 per cent and the gap between the yield on UK shares and government bonds (or gilts) is now the highest in 100 years.
It may be a cliché, but investors really do hate uncertainty. Meanwhile, we should never ignore the value of dividend yields. As we have highlighted previously, investors should always consider total earnings per share (including dividend earnings), not just share values.
Unloved can also mean undervalued, and the FTSE 100 index now trades on a valuation of 13 times forecast earnings and a dividend yield of 4.5 per cent, both of which look attractive compared with other international markets and the FTSE’s own history. We are therefore always on the lookout for opportunities to exploit such situations when we feel the time is right. We will of course advise you of any proposed changes to our model investment portfolios in due course.
Germany’s export troubles drag down growth in eurozone
The eurozone economy has stagnated this month as a manufacturing slowdown in the region’s largest economy continued to weigh on growth. Germany has cut its 2019 GDP forecast for the second time in three months, predicting growth of 0.5 per cent in the latest sign that Europe’s largest economy is grinding to a halt.
The government had already cut its forecast from 1.8 per cent to 1 per cent in January. Germany is now expected to underperform all 19 eurozone countries apart from Italy, which has cut its forecast to 0.2 per cent.
The news followed an earlier warning by Mario Draghi, president of the European Central Bank, that “pervasive uncertainty in the global economy” was weighing on the manufacturing sector. The eurozone is expected to grow by 1.1 per cent this year, down from the bank’s previous prediction of 1.7 per cent last December.
While the French and German manufacturing data improved slightly in March, both remain in ‘contraction’ territory. However the eurozone services data continues to indicate the domestic economy is holding up better, and this is also seen in the unemployment and wage data. We therefore remain comfortable with our current proportionate exposure to European markets.
Liontrust Special Situations fund
Liontrust Special Situations invests in UK stocks, particularly high-quality companies with strong brands and intellectual property, a significant amount of recurring business, and strong barriers to competition. The fund invests in a mixture of small, medium and large businesses that meet the strict criteria used by the managers. Its biggest holdings include the accountancy software firm Sage and Compass Group, which provides support services for the food and hospitality industries.
We have held this fund for some considerable time.
What the manager says: “Our investment process doesn’t involve predicting geopolitical or macroeconomic events,” said Anthony Cross, who co-manages the fund with Julian Fosh. “So despite the current uncertainty surrounding the UK economy, it’s business as usual — and that means focusing on what makes a company attractive.”
What the experts say: “UK equity funds have been widely shunned since the EU referendum,” said Jason Hollands at Bestinvest. “But this fund has long been one of our top choices and has delivered significant and consistent out-performance with relatively low volatility. Its approach has worked well in tough conditions and when markets are rising.”
IMF cuts global growth forecast to joint lowest level since crisis
The International Monetary Fund has cut its forecast for global economic growth this year to the equal weakest level since the financial crisis, amid concerns about trade tensions, high debt and the threat of a no-deal Brexit.
The IMF downgraded world growth for 2019 from 3.5 per cent to 3.3 per cent. Last year, the global economy grew by 3.6 per cent and it is expected to return to that level in 2020. Growth is expected to slow in countries accounting for 70 per cent of the global economy, it said.
In its latest World Economic Outlook, the IMF said that the biggest concerns about the global economy may have passed after the trade truce between China and the United States and signals from central banks, including the Bank of England, that the interest rate tightening cycle had been paused.
Among the severe threats identified were “sovereign-bank doom loop risks” in Italy, where banks are large holders of Italian government debt. That weakness could be exposed if markets switch to “risk off” or there is a no-deal Brexit.
The forecast for the UK was downgraded by 0.3 percentage points in the UK to 1.2 per cent, making it the fourth-fastest-growing G7 nation. If UK growth for this year was 1.2 per cent, it would be the worst year since the 2009 recession. For 2020, growth will be 1.4 per cent, downgraded from 1.6 per cent. The IMF said that in a no-deal Brexit the British economy would be at least 3.5 per cent smaller still, while the EU would lose 0.5 per cent.
These predictions have of course been anticipated by market analysts and reflected in prevailing stock market values.
This article is in the opinion of Reeves Independent financial advisers only and is not intended as advice and no investment decisions. The information in this blog or any response to comments should not be regarded as final advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding at April 2019.