The Big Picture: economic and political summary for February from QuotedData
Every month here at QuotedData, the investment trust analysts collate the insights on markets and economics taken from comments made by chairmen and managers of investment companies investing across the globe. We organise these to highlight what the sector’s trusts believe are the factors relevant to performance in their particular geography or industry sector.
The major factors at play over January were a weak US dollar and a strengthening oil price.
With the notable exception of the UK, stock markets continued to climb over the month.
As we approached the end of January, concern began to build that strong global growth would lead to further interest rate increases and government bond yields rose. This has now manifested itself in a sharp pull-back in markets.
Warnings about expensive valuations, rising inflation and the potential policy responses to that but no long-term gloom.
Mike Brooks and Tony Foster, the managers of Aberdeen Diversified Income & Growth, said that many mainstream asset classes appeared to be expensive. In particular, they saw little value in ‘safe’ assets such as developed market government bonds or investment grade corporate bonds.
Richard Killingbeck, chairman of Bankers Investment Trust, cited rising inflation and the reaction of central banks to that as one of the bigger macro issues affecting global markets in the year ahead. He cautioned on global stock markets and currencies; Alex Crooke, the manager of that fund, does not yet see the seeds of a global recession or prolonged market collapse, however. Richard Martin, chairman of F&C Managed Portfolio, cautioned that valuations in the US were stretched but thought that tightening monetary policy in the US had been well flagged.
QE and low interest rates have pushed up valuations but UK (domestically-focused) small caps have been held back by politics. Stronger sterling could highlight the relative attractions of domestic companies. As yet, the bond market is not indicating that interest rates will return to ‘normal’ levels, at least not in a hurry.
The managers of Henderson Opportunities highlight that the excess money created by ten years of quantitative easing has to some extent encourage asset price bubbles. Andrew Chapman, chairman of River & Mercantile Micro Cap, says that companies are investing in improved productivity as a way of handling inflation. The managers of Artemis Alpha draw attention to the potential impacts of strengthening sterling, notably lower inflation in the UK and a flattering of domestic earners’ results relative to overseas earner’s.
The managers of Aberforth Split Level Trust believe that the muted reaction of bond markets to stronger economic activity and the prospect of further rate rises might suggest that the “reflation trade” is another false dawn and that we might be condemned to low growth for years to come. Paul Trickett, chairman of Aberforth Smaller Companies, also highlights the tension between equity and bond valuations but draws attention to the valuation discount placed on UK smaller companies, possibly as a result of the UK political situation and Brexit.
Neil Hermon, manager of Henderson Smaller Companies, thinks the ‘normalisation’ of monetary policy will be a slow and measured process and points out that companies’ balance sheets are more robust than they were in 2008/2009.
The Japanese market is less expensively valued than its peers, there is cash that could be tempted back into equities and companies are increasing returns to shareholders.
Harry Wells, chairman of CC Japan Income & Growth, notes the recovery underway in the Japanese economy and the Japanese stock market’s valuation discount compared with its developed market peers. He also draws attention to the vast amount of money sitting in liquid financial assets earning poor returns in Japan and speculates that some of this could be tempted into equities. The manager of that fund says that the strength of the Japanese stock market is underpinned by the improvements in corporate performance and the steady but meaningful increase in returns to shareholders
A number of positive factors should work in Russia’s favour but political risks remain.
Gill Nott, chairman of JPMorgan Russian Securities, says that rising commodity prices, especially for oil, could have a positive economic impact on Russia in 2018. The economy is growing but sanctions and global politics are weighing on the stock market. The managers of that fund say Russia is a market where we could see interest rate cuts and lower inflation. They see scope for further economic reforms and believe that valuations are supportive if you can accept the current level of country risk.
Commodities and natural resources
The market is being too bearish on oil prices, technological change provides new opportunities and companies will not get carried away on the back of rising commodity prices.
Ed Warner, chairman of BlackRock Commodities Income, thinks commodity prices will stay strong in 2018. He points out that developments that are seen as threats to the sector, such as the growth of electric vehicles, provide new opportunities for the companies providing the raw materials needed to support this change. The managers of the fund think that companies will be more disciplined in the face of rising prices than they were in 2010 and that scepticism towards the sector is unjustified. They also note that, despite the growth of electric vehicles, oil demand is not expected to peak until 2030 – they think the market is being too bearish on oil prices.
Debt markets may become more volatile as economic policy become less accommodative.
The managers of Chenavari Toro Income are more relaxed about the European political situation than they have been in some time. They are expecting further US rate rises in 2018 and, towards the end of the year, an end to the ECB’s asset purchase programme. They think high yield bond valuations are stretched. The managers of TwentyFour Select Monthly Income think markets may become more volatile.
Ediston talks us through its views on the industrial, logistics and retail warehouse markets. Safestore gives us an update on the self-storage industry.
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Please click here to access the full macro commentary report for January.
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