Market Outlook Report – May 2018

Market Overview

May 2018

Recent Market Rebound
During May, leading shares hit a record high.  The FTSE 100 index closed up 53.77 points at 7,787.97 on 17 May, just breaching the previous record set in mid-January of 7,778.64.  The FTSE 250 index also reached a record high, up 190.65 points on the day to 21,019.44.

Relevance/ Impact 

Falling Inflation
During May, official inflation figures came in below expectations.  The annual consumer prices index dropped to 2.4 per cent in April from 2.5 per cent in March, undershooting forecasts that it would be unchanged.

The Office for National Statistics said that it was the lowest reading since March last year, when inflation was surging due to the currency’s collapse after the Brexit referendum.

Relevance/ Impact 

Impact of Political Turmoil in Italy & Spain
Late last week, Italy’s anti-establishment parties revived a coalition deal, removing the risk of new elections.  Italy has been trying to form a government since inconclusive elections in March.  Markets were unsettled by the recent collapse of the fledgling populist coalition after President Mattarella vetoed the appointment of a Eurosceptic economy minister.  This raised the prospect of another election as early as July that could become a proxy vote for membership of the euro.  The potential upheaval caused a sell-off in Italian assets over the past four days and bond yields to rise because of increased riks and market uncertainty.

Markets have also been spooked by political turmoil in Spain, where Pedro Sánchez, a socialist, has taken over as prime minister.  Spanish bond yields had been rising this week amid concerns that it, too, may face a snap election after a parliamentary vote of no-confidence in Mariano Rajoy, the prime minister. Those concerns eased on Friday

Relevance/ Impact 

Commercial Property Landlords in revolt over growing 'abuse' of CVA insolvency plans
An insolvency procedure that has been used this year by high street brands including New Look, Carpetright and Jamie’s Italian is in urgent need of overhaul, industry bodies have claimed.  Lobbyists for insolvency practitioners and restructuring advisers are calling for reform of company voluntary arrangements, which allow retailers to cut rents and to shut sites typically at landlords’ expense.

Relevance/ Impact 

Baille Gifford Shin Nippon investment trust 5:1 share split
The Baillie Gifford Shin Nippon investment trust has undergone a 5:1 share split, following a consistently impressive performance over recent years (a 46.1% increase in its NAV over the year to 31 January 2018 and a 54.2% increase in its share price over that period). By contrast, its comparative index, the MSCI Japan Small Cap Index, rose by just 17%. On a rolling three year basis, Shin Nippon’s NAV rose by 145.5% and its share price by 187.2% versus 75.0% for the MSCI Japan Small Cap Index.

As the investment trust's chairman points out, this fund is now one of the top three performing trusts of any type over three, five and ten years.  He is also “encouraged by the outlook”.

Relevance/ Impact 

EU Hits back at Trumps amid Escalating Fear of Trade War
​Brussels has hit back at President Trump’s protectionist tariffs on steel and aluminium imports by launching a legal challenge at the World Trade Organisation and threatening further counter-measures.  This move comes after Mr Trump announced tariffs of 25 per cent on 1,333 Chinese products in April in retaliation for Beijing’s “intellectual property theft”.

In a tit-for-tat move that has fuelled tensions over the risk of a full-blown global trade war, the European Union sent a formal complaint to the World Trade Organisation over America’s 25 per cent tariff on European steel and 10 per cent tariff on aluminium.  The WTO is a global referee in trade disputes.  The EU considers the US tariffs to be illegal.

At the same time, the European bloc published a ten-page document of US goods upon which it may impose retaliatory tariffs.  This ranges from Harley Davidson motorcycles to corn, cranberries, peanut butter and bourbon whiskey.  The list of goods the EU is targeting are mostly produced in areas set to be hotly contested in the forthcoming US midterm elections and are thought to have been deliberately selected to cause the biggest problems for the US administration.

The levies would come into effect by June 20 and would affect around €2.8 billion of US exports to Europe, in contrast with US tariffs on European metals worth €6.4 billion.

The EU also revealed that it was siding with the US on a different international issue as it launched legal action against China at the WTO over a battle about intellectual property.  The EU is challenging China’s insistence that European companies operating in its country give up the ownership and usage rights of their technology to domestic Chinese companies as the price of doing business there.

Relevance/ Impact 

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 June 2018.