Market Bulletin (29/10/2018)
Sir Christopher Wren, the architect behind the Royal Observatory in Greenwich, was born this week over 380 years ago and reversion to Greenwich Mean Time on Saturday night was met with the usual reminder of ‘spring forward, fall back’. Indeed, as the clocks were being turned back, this adage could be applied to financial markets, as a highly volatile week saw most markets hand back gains made in the early part of the year.
In the US, the S&P 500 dipped to its lowest point in a year on Wednesday, whilst the technology-heavy Nasdaq dropped more than 4.4% to suffer its worst single day of trading since 2011. The fight back on Thursday was short-lived and, despite better-than-expected economic growth of 3.5% in the third quarter, Friday saw big losses once again as a broadly disappointing earnings season and fears for long-term growth took hold.
“It is no great surprise to us that this month’s sell-off has been largely driven by the dumping of growth stocks on very elevated valuations,” commented Majedie, manager of the St. James’s Place UK Growth fund.
How true – Amazon and Alphabet, parent company of Google, lost $100 billion in market value between them on Thursday, after announcing results that missed optimistic targets. This came even though Amazon made record quarterly profits of $2.9 billion, and revenues rose to $56.6 billion, compared to $43.7 billion in the same period in 2017. On the other hand, some technology companies received a more positive response from the market, with Twitter, Tesla and Microsoft posting impressive earnings.
Meanwhile, London’s FTSE 100 held up marginally better against challenging conditions last week, but still closed the week down more than 2% to hit a seven-month closing low. The UK market is 12% below its peak at the end of May this year and certain stocks were badly hit, with WPP, the marketing giant, falling over 10% and financial companies weighing heavily on the index earlier in the week, following the release of quarterly results.
After reaching historic highs this year, many equity markets are now in ‘correction’ territory, some 10–15% off their earlier peaks. The issues creating the current market uncertainty are largely nothing new – corporate earnings, rising interest rates, and international politics over issues such as trade tariffs, Brexit and Italian uncertainties. Yet while unsettling for some investors, the recent falls need to be put into the context of the returns enjoyed during the last decade – the FTSE 100 has risen 171%, the S&P 500 is up over 364% and the MSCI World has returned 259%, in sterling, total return terms.
The Prime Meridian at Greenwich does not just dictate our time zone, but also divides the world into the Eastern and Western hemispheres. Unlike the West, Eastern nations do not partake in the biannual hour shift; China hasn’t altered the clocks since 1991 and Japan since 1951.
However, divisions of a different kind between China and the US have been brought into sharp focus recently with the introduction of tariffs and signs of a heightening trade war which has impacted wider Asian economies. One source of unwanted unity has been found in the market sell-offs, with Shanghai’s CSI 300 Index reflecting the volatility in the US. Meanwhile, Japan’s TOPIX touched its lowest point for 12 months last week and the Nikkei fell to its lowest point since March.
The CSI 300 in Shanghai started the week with its biggest surge in three years on the back of strong promises of support for the economy from President Xi Jinping. Despite dropping back as the stormy midweek trading activity took hold, the index still closed with weekly gains of 1.2%.
Investors have grown nervous as growth in China slows and companies report increased costs due to labour shortages and tariffs. Falls in the US market have been partly attributed to growth warnings from manufacturing giants such as Caterpillar, which blamed currency headwinds for its poor results, as a strong dollar poses a challenge to manufacturing exports to the developing market. Sentiment has been tested in October, with global stocks suffering their worst month in more than six years.
Although last week’s market gyrations saw some investors retreat to safe havens – the price of gold has jumped more than 3% this month – the uncertainties provide just the opportunities sought by long-term investors.
“Following the recent pull-back in markets, we have started to increase our equity allocations,” commented Johanna Kyrklund of Schroders, manager of the St. James’s Place Managed Growth fund. “The move is tactical; we are in the mature phases of the equity bull market, but we believe we have a window of opportunity.”
Following a decade when growth strategies have outperformed, there are increasing signs of a return to a focus on company fundamentals. “When a regime change from growth to value occurs, the moves are sudden and violent and hence investors need to position themselves ahead of the event,” commented Nick Purves of RWC Partners, manager of the St. James’s Place Equity Income fund. Such shifts also emphasise the importance of a portfolio strategy that blends different investment styles.
UK equities are more out of favour, and more undervalued compared to the rest of the world, than at any other point this century. They may remain so while Brexit uncertainty persists, but with the FTSE 100 yielding 4.62%, investors are currently being paid relatively well for their patience. “This strikes us as one of the biggest investment opportunities for years,” added Purves.
Whatever happens in markets over the next three to six months, clients mustn’t lose the focus on their long-term objectives and remember that achieving those objectives requires some risk to be taken.
“I was born with a wallet in my hand,” so said entrepreneur Gilberto Benetton, who died last week, when describing his uncanny ability to make the right financial calls for his family clothing business. However, it is his compatriots who may have lighter wallets after the ECB rejected Italy’s budget proposal – the first time an EU country has ever had a budget proposal rejected.
Rome is sticking to its plan to run a deficit of 2.4% of GDP next year, breaching the EU’s budget rules, and the European Commission gave Italy three weeks to rewrite its budget. This news followed a downgrade from Moody’s last week which put Italy’s sovereign debt one rating above junk. However, Prime Minister Giuseppe Conte is adamant that the challenges his country faces and its position at loggerheads with EU financial leaders will not ultimately lead to ‘Italexit’.
The challenges in Italy and wider Brexit uncertainty are contributing to revised growth projections in the eurozone, with Mario Draghi, the President of the European Central Bank, announcing that the euro area economy is projected to grow at a slightly slower pace this year and next. GDP growth expectations this year have been revised down to 2.0% from 2.2% and next year from 1.9% to 1.8%.
Survival to revival?
Despite lurid headlines the previous weekend, with unnamed MPs baying for blood, Theresa May soldiered on as prime minister following testing encounters with her Cabinet and the backbench 1922 Committee. One MP suggested the atmosphere was not a “lions’ den, it was a petting zoo” and her speech was met with the traditional, congratulatory banging of the table.
Despite the positive response, May will be hoping her chancellor, Philip Hammond, is able to throw some ‘red meat’ to backbenchers in today’s Budget, having received welcome news that public spending cuts and tax receipts have combined to provide a £13 billion windfall. Both May and Hammond have suggested that this Budget is the beginning of the end of austerity, with the NHS earmarked for an increase in spending.
Majedie, RWC Partners and Schroders are fund managers for St. James’s Place.
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