Whitechurch Asset Views - February 2017
January saw the start of the Chinese New Year, marking the Year of the Rooster. Known for his crowing and tweeting, Donald Trump spent the month bringing a few policy chickens home to roost. Not least with his immigration ban which has led to some universal protestation. Such politicking certainly influenced markets and currencies but global equities registered positive returns, with Asian and Emerging Markets outperforming their Developed Market counterparts over the month.
Away from the political noise, recent global economic data has been broadly positive. Global manufacturing Purchasing Managers Indices (PMIs), which provide an indicator of business confidence, hit levels not seen for nearly three years. This provided optimism that global GDP growth could be upgraded to 3%, up from a forecast of 2.7%.
Headlines in the UK continue to be dominated by all things Brexit and we have previously stated that trying to work out what form it will take is fruitless. However, at the moment, Brexit is not adversely affecting the UK economy as predicted, with recent growth forecasts for the year being upgraded from 1.4% to 2% for the year. This could provide some stability for sterling and see investors turn their attention to UK small and mid-caps.
Looking overseas, it has been a positive start to the year for regional equity markets. The reflationary outlook continued to drive up demand for higher risk assets in January. The pro-growth policies that have been set out by the Trump administration have created a wave of optimism, and with the volatility index at very low levels, we wonder if investors are becoming complacent. However, we have been selectively increasing tactical exposure to the US and Europe, adding smaller companies exposure in the former and economically sensitive, domestically focused positions in the latter.
Asian and Emerging Market equities have started the year strongly, largely helped by dollar weakness over the month. The biggest risks facing these markets in the short-term remain the strength of the US dollar, 10 year US Treasury yields and any Chinese economic instability. However, we can now add potential trade tariffs as another one as Trump seems adamant on applying his pre-election policy pledges.
The reflationary outlook has led to a soft start for government bonds, as yields increased and prices fell. Inflation numbers in the US, UK and Eurozone have been spiking up, driven by oil and commodity prices. Inflation is the enemy of bonds and investors are looking to higher risk areas of bond markets or alternative asset classes for real returns. However, we are still not convinced that the inflationary environment is here to stay just yet or that this is the end of the 30 year bull market in bonds.
The unpredictable politically driven events that are set to unfold throughout the year are not a reason in itself not to invest. We have seen that hiding in cash in 2016 as protection from last year’s shock events would have seen you miss out on double digit returns across most global equity and bond markets. Indeed, even with some equity indices reaching all-time highs, we believe that the year ahead can provide many opportunities for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective.