The Big Picture: economic and political summary for May 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.
Global stock markets rose in April. Concerns about protectionism appeared to soften and the oil price weakened and tensions in the Middle East abated. US and Eurozone equities posted a narrow gain, supported by ongoing strength in economic data, a buoyant oil sector and reduced trade worries. Sterling weakness and expectations of a rate hike in the UK fell after some disappointing economic data. Japanese equities gained as yen weaken against the US dollar on reduced geopolitical risk. Emerging markets equities return were negative due to US dollar strength.
Cautious optimism for equity markets, with rising inflation less of a concern. Geopolitical risks remain.
There has been a marked change in the views expressed by the chairs and managers of global investment managers. Alan Hodson, chairman of JPMorgan Elect suggested that robust global growth should support earnings and that they expect dividends to continue to increase. However, interest rates are expected to rise in the US and UK, and markets are already highly rated.
The chairman of Henderson International Income, Simon Jeffreys wrote that economic growth has improved while unemployment continues to fall in most major economies. Although expected interest rate increases (although modest) in countries such as the US and UK have happened, elsewhere monetary policy has focused on stimulating economic activity.
Against this, the political landscape remains as uneven as ever. Chairman of Martin Currie Global Portfolio Trust, Neil Gaskell, notes that the markets have been strong for some time, although there has already been one short-term market correction. He proposes that it is possible that others could occur, especially if inflation exceeds current expectations of a gradual increase during the year.
Cautious optimism: the growth of UK’s domestic economy has underperformed the global economy, although this looks set to change
Although all of the commentators on UK equities in this month’s review agree that the outlook for the UK economy is positive, they differ in the extent to which they expect it will perform.
Tom Bartlam, chairman of Jupiter UK Growth Investment Trust, says that the UK domestic market has been out of favour with investors recently and believes that in due course this sentiment will change; the investment managers of Mercantile Investment Trust wrote that economic growth has displayed improving momentum across the globe for well over a year now, and that the UK has been less impressive.
Alex Wright, manager of Fidelity Special Values, says that global growth trends remain intact, albeit the UK is now underperforming other developed markets. As do many, he sees this as at least partly due to concerns around Brexit negotiations and lower levels of disposable income for consumers.
With regard to UK smaller companies, Nicholas, Fry (chairman) and Mike Prentis (manager) of BlackRock Smaller Companies Trust also write that the UK economy is underperforming global markets and they are wary of the UK economy, particularly for companies with a focus on the domestic market.
Volatility has returned to Asian markets
After a strong period of performance and low interest rates, many of the chair-people and fund managers speculate how this might end. James Williams, chairman of Pacific Assets Trust and Peter Arthur, chairman of Aberdeen Asian Income Fund, both point to this and highlight the recent volatility that has come about as a result; Nigel Cayzer, chairman of Aberdeen Asian Smaller Companies Investment Trust, suggests that volatility can bring high valuations back down to sensible levels.
Mike Kerley, fund manager of Henderson Far East Income, proposes that the outcome of the move to place tariffs on goods and services by the US is impossible to predict; the investment management team at First State Stewart, who manage The Scottish Oriental Smaller Companies Trust, say that their concern remains the economic growth in the region has happened against a backdrop of rising debt levels at a time when interest rates are near all-time lows.
Although interest rates have started to rise, the pace of these increases has been modest. Susan Platts-Martin, chair of Witan Pacific Investment Trust, writes that corporate earnings growth remains a strong support for markets and the regional earnings outlook appears healthy.
Although cognisant of the risks, investors see good prospects for European equities
Eric Sanderson, chairman BlackRock Greater Europe Investment Trust comments that, following a strong start to the year, markets suffered a slowdown and the Eurozone composite Purchasing Manager’s Index (PMI) slipped to a three-month low, adding to concerns over the growth outlook.
The management team at BlackRock suggest, however, that the recovery within the euro area remains broad based, with the outlook for expansion in both manufacturing and services robust. Indeed, they say that Europe also sees buoyant demand regionally, despite some more testing political situations
Confident in the future for Canadian stocks, but wary of the outcome of NAFTA renegotiations
“We believe the Canadian economy will benefit from strengthening labour markets, a stable political environment and a recovering energy sector” writes Nicholas Villiers, chairman of Middlefield Canadian Income. The company is positive on Canadian equities due to the broad selection of quality companies paying high and growing dividends. In the near term, the primary risk to economic growth is the uncertainty surrounding the ongoing renegotiation of the North American Free Trade Agreement (NAFTA) between Canada, the U.S. and Mexico
David Robins, chairman of Fidelity Japanese Values believes the positive global economic outlook, along with the supportive domestic policy environment, should help Japanese companies to post another year of robust profits. The US tax reform legislation enacted in late 2017 could also provide a boost to Japanese companies that are heavily geared to the US market.
The view of the managers of Schroder Japan Growth remains positive, although they recognise more headwinds than six months ago. Positive drivers include supportive monetary policy, relatively low valuations, corporate governance improvements and positive funds flow.
Following a visit to Japan, there is much to be positive about, writes Neil Donaldson, chairman of Baillie Gifford Shin Nippon. There is a drive to improve corporate governance. More external, independent directors are being appointed to boards and this in turn will afford greater consideration and protection for shareholders.
Continued positive outlook for Latin America, with caution for emerging markets overall.
The investment managers of JPMorgan Global Emerging Markets Income Trust, comment that valuations in Emerging Markets are at a more neutral level when compared to history, having been more clearly cheap in 2016 and 2017.
This partly reflects the improvement in fundamentals after what had been a difficult few years for Emerging Markets economies and companies. The chairman of the company writes that, whilst recognising the investment manager’s positive outlook for stock selection in Emerging markets, the board is mindful of the economic, market and political risks that could yet erode what is otherwise a reasonably constructive outlook.
Richard Prosser, chairman of Aberdeen Latin American Income Fund believes that the outlook for Latin American markets remains positive. Supported by the broadening global growth and stabilised commodity prices, as well as improving fundamentals and benign inflation, the region seems to be in good shape to deal with domestic and external challenges
2017 was a year of strong economic growth and stock market performance for Vietnam.
Wolfgang Bertelsmeier, chairman of Vietnam Enterprise Investments wrote that, with a stable currency, healthy IPO pipeline, continued GDP growth and low levels of inflation predicted for 2018, they remain positive on the outlook for Vietnam. Market prospects remain bright going into 2018 thanks to the stable growth of the economy with expected GDP growth of 6.7% and inflation remaining at around 3%.
The chairman of Weiss Korea Opportunities wrote about investing in a market that has been the focus of geopolitical concerns. The South Korean stock market and the South Korean economy shrugged off all this troubling news to achieve the best performance of any major market in 2017. (GDP grew 3.1% in 2017.
Commodities and natural resources
The current global recovery has been supportive of sentiment towards the mining sector. Gold stocks remain cheap
Howard Myles, chairman of Baker Steel Resources Trust, comments that the current global recovery has been supportive of sentiment towards the mining sector. The subsector of the market enjoying the most investor interest is that associated with electrification of motor vehicles and battery technology.
Malcolm Burne, chairman of Golden Prospect Precious Metals believes that precious metals currently sit as an attractive investment asset class in relation to today’s geopolitical and macro-economic climate. He suggests that the salient factors currently in play include peak gold, inflation, China and Russia Central Bank buying, Fed policies on interest rates, mounting debt issues, equity bubbles, global conflicts and more recently the emergence of super power trade wars.
The managers of the company say that precious mining shares are truly languishing, trading at prices only seen when gold was half or even a quarter of current levels.
A positive outlook in the UK. The outlook for Europe is less clear.
Stuart Cruickshank, chairman of P2P Global comments that they continue to closely monitor the political and economic uncertainty created by Brexit. Although current market conditions remain benign, the longer-term economic outlook and impact of Brexit on customers and wider markets remain uncertain.
William Frewen, chairman of NB Global Floating Rate Income Fund believes that the outlook for 2018 is favourable for short duration asset classes such as senior secured floating rate loans. He expects to see further rate rises in 2018 in the US and probably in the UK. He goes on to say that, all of these positive tailwinds come with the caveat of significant political uncertainty, such as Brexit negotiations and trade relations, which have the potential to derail any positive momentum and could lead to increased volatility across global markets.
Andrew Adcock, chairman of VPC Specialty Lending agrees that the political and macroeconomic outlook continues to appear generally positive for lenders under the new administration in the U.S. The managers of VPC write that, heading into 2018, they are taking a very cautious approach to credit given the long economic expansion in the U.S. and a loosening corporate credit environment.
The managers of Blackstone / GSO Loan Financing comment that in Europe, in their sector, they believe that the supply and demand imbalances will continue to performance in the European loan market. They too see the tax changes in the US as beneficial.
The outlook for the coming year in the UK looks more moderate than last year
Robert Peto, chairman of the Standard Life Investments Property Income Trust, said that they expect more moderate economic growth for the next year. However, the extent of this moderation will be largely dependent on the perceived success or otherwise of the Brexit negotiations which, in turn, will impact on the level of business investment.
Chris Russell, chairman of F&C Commercial Property Trust commented that an environment of higher interest rates and inflation, subdued economic growth, political uncertainty and some keen pricing may begin to weigh heavily on investor sentiment in 2018. Will Fulton of Standard Life Investments, and fund manager of UK Commercial Property Trust, said that the market is likely to be sentiment driven in the short term as politics and the real and perceived economic impact associated with the UK’s withdrawal from the European Union continue to evolve.
Given the backdrop of ongoing heightened macro uncertainty, investors are becoming more risk averse and betterquality assets are once again broadly outperforming poorer quality.
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