Global Market Review

Market sentiment: Confused – investors are unsure if we are on the brink of a global trade war, fuelled by nationalist political agendas worldwide, or is the current wave of political populism a temporary phenomena, and we should instead focus on the positive macroeconomic fundamentals, particularly in the U.S ? The VIX index of implied volatility (the so-called ‘fear index’) stands at 17, high by historic standards.

Optimism turned to anxiety: the optimism at the start of the year, when global stock markets enjoyed a ‘melt-up’ in January, has been replaced by one fear after another. This persistent run of anxiety accounts for the rise in market volatility over the last six months and the low returns from global stocks, despite good corporate earnings growth particularly in the U.S. The MSCI World index is up just 0.3% in USD, and a slightly more respectable 1.3% in local currency terms.

Fear of inflation triggered the late January/ early February correction, fear of a flattening Treasury yield curve has been with us all year, fear of a credit crunch in China comes and goes and with it we know have fear of a renminbi devaluation. But it is fear that Trump has let the mischievous trade war genie out of the bottle that now most concerns investors.

The most vulnerable stock and bond markets are currently those in the emerging markets. Not only because many have their growth models built around their export sectors, which are vulnerable to higher U.S import tariffs and quotas, but having borrowed massively in USD earlier this decade are now vulnerable to higher borrowing costs in local currency terms as dollar rates rise and the USD strengthens in response.

By the autumn will we perhaps look back on this period as one of bluster from Trump, over-demanding his initial goals as a negotiating tactic to intimidate his opponents, as he recommends in his seminal book on management, ‘The Art of the Deal’? Or are we really on the brink of something bad, with nationalist governments around the world emulating Trump and spurning multinational agreements and organisations on the grounds of national exceptionalism? 

Investors can protect themselves: a diversified portfolio is the only sensible investment approach in such uncertain times. With, perhaps, an accent on developed quality stocks and short dated government bonds, at the expense of an underweight position in emerging market stocks and high yield bonds. Fundamentals suggest further dollar strength over the coming months.

Don’t forget the good news: it’s boring by contrast to Trump’s tweets, but there is still stock market-supportive news flow. U.S second quarter S&P500 earnings are forecasted to be up on average by 19%, significantly contributing to valuations on Wall Street. The most recent global GDP forecasts have admittedly lowered their predictions for economic growth rates this year, but marginally. Eg, in mid-June the Conference Board lowered its global GDP estimate for 2018 from 3.3% to 3.2%, the same rate that we saw in 2017.

Meanwhile global monetary policy remains loose, with risk-free rates well below dividend yields in most major economies aside from the U.S where the 10yr Treasury yield of 2.8% matches that of the yield on the S&P500. The U.S Fed is raising interest rates, but cautiously, with the stronger dollar helping to contain any inflationary pressure resulting from Trump’s fiscal stimulus.

Brexit: hard-line Brexitiers suspect that they are losing their battle to ‘take back control’ and that the U.K will remain in the E.U customs union permanently, with elements of the single market also applying. This will prevent any free trade deals being made with third countries. 6th July sees May once again try to hammer out an agreed position on Brexit with her cabinet, that she can then present to Brussels. If the result is for a Norway-like soft-Brexit relationship, with caveats over E.U migration, sterling will rally. If hard Brexitiers win out, sterling will fall. Most likely, though, is no agreement and a statement released to the press assuring us of the government’s ‘ongoing commitment to delivering Brexit’, without explaining what they mean by Brexit.

Trump’s contradictory policies: adding to the sense of confusion are the contradictions contained in a number of Trump’s policies, which will surely only make him angrier. First comes the U.S trade deficit, which Trump wishes to reduce, seeing it as an afront to the dignity of America. This is a view of trade that is shared, incidentally, by Germany, China, Japan etc who consider their trade surpluses as a sign of economic strength rather than an indicator of structural imbalances in their domestic economies. 

Yet America’s trade deficits are likely to grow as a direct result of Trump’s tax cuts. In today’s globalised world Joe Sixpack is as likely to spend any tax cut on a China-made T.V from Walmart as he is on a Ford pick-up truck made in the U.S. Companies wishing to re-invest their tax cuts into new I.T may choose an American company’s products, but when they arrive the crates are stamped with ‘Made in Thailand’. 

Another contradiction is Trump’s oil price policy: Trump has made clear that he wants U.S petrol prices to come down before the mid-term elections this autumn, but is urging allies to boycott Iranian crude. Sanctions and boycotts support the oil price. Last week Saudi Arabia led efforts to cut OPEC and Russian supply by 1 million barrels per day. Yet the oil price barely moved, with analysts suggesting that sharp fall-offs in supply from Libya and Venezuela, combined with boycotts of Iranian output, could lead to a reduction of 2 million barrels by December compared to December of last year. This is supportive of the oil price, particularly given the steadily increasing demand from a (generally) healthy global economy. Trump may well decide to ease up on Iran, at least until the new Congressmen and women are in place

A multi-asset portfolio for the long term. We favour a long-term multi-asset approach to investing, whereby investors choose a suitable combination of global equities and bonds (depending on their risk profile and investment horizon), and leave the portfolio unchanged. Regular re-balancing ensures winners are sold and losers are bought – which financial history, and common sense, supports. Financial history shows this combination to offer good returns relative to risk (ie, volatility). Investors should try to be as diversified as possible, perhaps using the 60/40 model as their guide. Multi-asset funds based on this principle are available, often with different ratios of bonds and equities depending on the level of risk suitable for an investor.