Market Outlook Report – May 2017

Overview

The Reeves Investment Team met last week and are advising multiple changes to our Model Portfolios. The relevant clients will be contacted under a separate cover.

Stock Market

The FTSE 100 touched another record high last week, driven by shares in commodity companies, which were boosted by China’s pledge to spend $124 billion on global infrastructure projects. The price of Brent crude rose to $53.49 a barrel, helped by a Saudi-Russian agreement to extend production cuts for nine months.

The FTSE 100 index exceeded the 7500 barrier for the first time last week.

The dollar fell to a six-month low last week, as it emerged that President Trump tried to block an FBI investigation into his ties with the Kremlin. The end of the eight-year bull-run in US equities has been called, with growing unease and speculation over the US Trump administration (see further detail below).

UK Economy

Almost a year after Britain voted to leave the EU, signs are emerging of a slowdown in business activity. Whether Brexit ultimately leads to a more vibrant economy in years to come is unknown; accurate predictions are difficult to make due to the opaque and unprecedented nature of the negotiations that will come. Meanwhile, companies are being forced to take short-term decisions in an environment of uncertainty.

Overseas investors continued ploughing money into Britain last year, with foreign direct investment soaring to £197bn, up from £33bn in 2015, according to the OECD.

The economy grew by just 0.3% in the first quarter, against the Bank’s expectations of a 0.5% rise, as the weaker pound pushed up prices, driving consumers to cut spending.

Along with weak first quarter growth figures, there is little sign that wage growth is picking up, suggesting inflation is a consequence of the weaker pound not a homegrown phenomenon.

Financial markets are now pricing in a rise in Bank rate to 0.5% in spring 2019. It may well be that Mark Carney will not see an interest rate rise throughout his tenure as Governor of the Bank of England, which ends in June 2019.

Europe

​The Eurozone posted faster growth in the first quarter of 2017 than the UK And America.

The eurozone has been recovering strongly for more than a year, posting faster growth in the first quarter of 2017 than the UK and America. Inflation is at the target rate of 1.9 per cent but the central bank shows no signs of slowing its stimulus programme. Its key interest rate is at zero and it is buying €60 billion of bonds a month under a quantitative easing scheme not due to end until December. However, the president of the ECB, Mario Draghi, has warned that Europe’s weak jobs market remains a big obstacle to higher interest rates as he defended the European Central Bank’s cheap money policy. Mr Draghi acknowledges that the eurozone economy was strengthening but said it was “too early to declare success” in the fight against low inflation.

​We have maintained our proportionate asset allocation within our selected European funds which continue to perform well, with the prospect of further growth.

US

Last week, the dollar suffered its worst weekly slump in a year amid fears for Donald Trump’s presidency and in the face of a resurgent euro. It tumbled to its lowest level since the property magnate was elected.

Against a trade-weighted basket of six currencies, the dollar slid by almost 2 per cent this week, wiping out all the gains of the “Trump bump” since November 9. It was the steepest weekly fall since April 2016, dipping 0.6 per cent in one day alone.

Investors have dumped the dollar after the uproar over Mr Trump’s decision to fire James Comey, director of the FBI, and amid allegations of links between the president’s team and Russia.

Analysts said that the sell-off had been sparked by fears of a political fallout that could delay or derail the president’s fiscal stimulus plans, which have underpinned Wall Street’s rally over the past six months and had raised confidence in the economy.

Donald Trump’s pledge to grow the US economy by up to 4 per cent a year has been dealt a blow by official figures, which suggest that growth in the first three months of the year had been the weakest since 2014. First-quarter GDP climbed by 0.7 per cent on an annualised basis, below expectations of a 1.1 per cent increase. Growth in consumer spending, the driving force behind the US economy, fell to 0.3 per cent, its lowest level since 2009.

Reeves Independent isn’t having to react to growing political unease concerning the Trump administration’ having already proactively pre-empted it by reducing our exposure to US equities, following our monthly Investment Team meeting in March.

Gold

The Trump administration’s promised infrastructure boom and the threat of US interest rate rises has quelled demand for gold, despite a recent clamour for safety by Chinese investors. Recent figures released by the World Gold Council showed that global demand fell 18 per cent in the first quarter after 2016 when the Brexit vote, European banking jitters and uncertainty over the US election pushed demand to a quarterly record.

Last year the demand was driven by institutional investors pouring money into exchange-traded funds (ETFs). This year however, demand for gold through ETFs dropped by 68 per cent to 109 tonnes in the first quarter.

​Given the ongoing political, economic and market uncertainty, Reeves Independent is retaining the ETFS Physical Gold holding as a core component in the model balance investment portfolio.

Oil/Energy

Soaring output from America’s shale oil producers is threatening to unstitch the blanket of support within Opec for cuts to the cartel’s production. Opec members led by Saudi Arabia will meet in Vienna on May 25 to decide whether or not to extend a deal introduced in January to cut oil output by 1.2 million barrels per day and in turn increase or at least support prices.

Meanwhile, growing output from Libya, an Opec member that has been exempted from the cuts because of a domestic conflict, is also adding to plentiful supplies.

​Reeves Independent retains a core holding in the ETFS Brent Oil 1 month ETC as part of its diversified model balance investment portfolio.

Please read the full version of our Market Outlook by clicking below.