FTSE falls to four month-low during September
Last month saw London's blue chip stocks fall to their lowest finish since April as the pound sharply reversed earlier softness, oil prices weighed and UK business optimism remained low amid trade and geopolitical tensions. At one point, the FTSE 100 was down to 7,229.75 (on 11 September), but has since recovered. The FTSE 100 reached an all time high of 7877.45 in May of 2018.
Some of this downward movement early last month followed a sharp rally in the value of the pound against the dollar, after Bloomberg reported that the UK and German governments had dropped key Brexit demands. Hopes that the apparent breakthrough would lessen the chances of the UK falling out of the European Union without a deal sent the pound more than a cent higher against the dollar to $1.297.
A higher sterling value means that UK exports would be more expensive & UK company valuations denominated in US$ are reduced, which the stock market does not welcome. These erratic market fluctuations reflect the sensitivity of markets to global news & ongoing political developments. This is inherent inevitability that stock market prices and fund values will also fluctuate to reflect this sensitivity. Share prices don’t move in a straight line.
Tech giants fall after US Senate hearing
A sustained sell-off in American technology shares and fears about a global trade war pushed world stock markets down in early September.
Technology investors were unimpressed with the congressional testimony of top executives from Facebook and Twitter, who were called to answer questions about election meddling on their platforms. Their testimony sparked a short-term sell-off.
Investors appear to be increasingly worried that US Congress will seek to regulate big technology companies more closely. The questioning by the Senate intelligence committee of Sheryl Sandberg, chief operating officer of Facebook, and Jack Dorsey, founder and chief executive of Twitter, suggested that it would take a more aggressive approach to the matter.
Scottish Mortgage Investment Trust in particular is tilted heavily towards the global technology sector, which is dominated by the US. The £8bn trust – led by James Anderson – has some of the well-known stocks usually labelled as ‘tech’ among its top ten holdings, including e-commerce giants Amazon.com and Alibaba, internet-related services providers Baidu and Tencent or internet entertainment service Netflix.
Market anxiety has since subsided and a degree of stability returned to the technology sector. We will be retaining our Scottish Mortgage Investment Trust holding for the foreseeable future; indeed we have recently increased our allocation to this fund within our model portfolios. We have also added the Janus Henderson Global Technology Fund & AXA Framlington Global Technology Fund to our model investment portfolios.
Scottish Mortgage Investment Trust recommended in Sunday Times
The Baillie Gifford Scottish Mortgage Investment Trust is one of cornerstone, long-term portfolio holdings, which has returned 23.7% growth over the past year (11.9% over the past 6 months, despite adverse global market headwinds). With a creditable 5* FE Crown Fund Rating with Trustnet, it has won a hat-trick of Money Observer awards for Best Global Growth Trust in 2015, 2016 and 2017. With established investments in Amazon, Google or Apple, the fund mantra is “resolute optimism”. The average annual fee for this investment trust is 0.98%.
This is positive & reassuring commentary on a core holding within our model investment portfolios and reflects why we have recently increased our exposure to this fund.
Confidence in the UK stock market plunges
Retail investors’ confidence in the value of the British stock market appears to have dropped to its lowest level in 23 years.
An index of investors’ mood compiled by Hargreaves Lansdown, the investment firm, has fallen by four points to 58, the lowest since the measure began in 1995 and surpassing lows seen after the Brexit vote, President Trump’s election and at the height of the financial crisis. The latest monthly figure compares with an average of 71 points over the past year and a decade-long average of 92.
The UK was the only region to experience a decline in investor confidence over the last three months. The 10 point fall in confidence since July compared to an average 6.6 gain across six major geographical weightings during the period.
UK retail investors have withdrawn around £10 billion out of UK funds since the EU vote was announced, in favour of international investments.
This recent negative sentiment towards the UK markets highlights the benefit of holding a diversified range of funds covering a global spectrum of international markets, as well as a significant cash balance in anticipation of future investment following a widely expected major market correction at some point.
Wall Street hits new records
Towards the end of September, a rebound in technology and banking stocks overcame recent fears about rising trade tensions between the United States and China to produce yet more Wall Street records
The Dow Jones Industrial Average's highest closing record is 26,743.50, set on 21 September 2018. It followed a record set the previous day. These were the first records set since 26,616.71 reached on January 26, 2018. After hitting that peak, the Dow went into free fall. On February 8, it entered a market correction, which lasted 6 months until August.
Apart from our direct exposure to the US stock market via the Fidelity American Special Situations fund, we have recently strengthened our exposure to the US technology sector, which we believe has further growth potential in the foreseeable future and the US remains a global technology hub.
"Dollar bulls are wrong, you should back emerging markets"
Investors shouldn’t allow the strong dollar to put them off emerging markets, as many of the greenback’s drivers are likely to fade away over the long term, according to Neptune Investment Management’s James Dowey. Neptune’s chief economist said that the long-term bull case for the dollar may be overdone and so-called ‘dollar bulls’ need to face a number of reality checks.
“What we’re seeing right now in China is deceleration partly related to the tariffs from the US but also due to historic tightening in late 2016 and early 2017,” he said. “It’s not great for emerging markets. However, we took a forward-looking perspective with China and what we see now is an aggressive set of simulative policies, which we believe will stabilise growth towards the end of the year and the start of next year and be very good support for emerging markets.”
Similarly, Mark Coombs, the Chief Executive Officer of the financial services business, Ashmore Group PLC, is not concerned by the recent turbulence within emerging markets and has encouraged investors to take advantage of cheaper valuations that are now present.
“The recent weakness in emerging markets asset prices has not, with one or two exceptions, been caused by a deterioration in economic fundamentals, but rather by a number of developed world events that have led to broader risk aversion in global markets,' Coombs said. 'Asset prices have extrapolated the challenges faced by a small number of emerging markets countries across the broader universe. This therefore presents another highly attractive entry point, with valuations back to levels seen 18 months ago immediately following the US election and which underpinned a subsequent period of strong returns.”
The performance of the US dollar and emerging markets are linked and observable over the years, with Dowey noting strong periods of performance for the MSCI Emerging Market index at times of challenges for the US dollar and vice versa. If these analyses & predictions are correct, this would be good news for our recently increased holding in the BlackRock Frontiers Investment Trust plc.
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 September 2018.