Whitechurch Asset Views - June 2017
If you had obeyed the old adage ‘sell in May and go away’, you would be kicking yourself last month. May proved to be a good month for investors as virtually all asset classes gained in value. Unusually, global equity markets and bond markets both ended the month in positive territory, and even the gold price moved marginally upwards!
Of course, we cannot avoid mentioning the recent UK general election result. Theresa May’s gamble backfired as she lost the Conservative Government’s majority and we ended up with a hung parliament. Whether she can formulate a minority government has not been verified as of yet but her position of strength on a hard Brexit has been eroded and so a more placatory stance in our Brexit negotiations with Europe could well be on the cards. This could prove a positive, as market sentiment was not entirely comfortable with May’s hard Brexit stance of the UK being out of the single market and the customs union.
In Developed Markets overseas we continue to favour European equities over US equities and this strategy has been very fruitful year-to-date. In sterling terms, MSCI Europe ex UK is nearly 10% ahead of MSCI USA (13.4% vs. 3.9% as at end of May). With Emmanuel Macron winning the French Presidential race, much of the political uncertainty that was shadowing the outlook for European stockmarkets dissipated and sentiment has improved.
US markets shrugged off some politically driven concerns mid-month as Trump came under fire over his dismissal of former FBI director. There is a growing disparity in US markets, with much of headline grabbing performance coming from the big tech stocks such as Facebook, Amazon, Apple, Netflix and Google. With the US earnings season coming up, this could be a crucial time for the world’s biggest market, which we believe has been expensive for some time.
Asian and Emerging Market equities continue their strong run year-to-date, no doubt buoyed by the relatively weak dollar. Trump’s recent trade agreement with China suggests a softening of his pre-election protectionist pledge which will improve sentiment. No matter where you are, politicians are making headlines. Over in Brazil, President Michel Temer was implicated in corruption charges, which saw the Brazilian equity market nosedive. The commodity rally appears to have run out of steam and we are generally avoiding the commodity influenced markets in these regions.
As mentioned, bond markets also improved over the month. The majority of Developed Market bond yields narrowed as inflation numbers in the US and Europe eased and markets returned to the low inflation, low growth outlook that has supported bond markets for several years. The check in the reflationary outlook suggests that this is not the end of the 30 year bull market in the asset class. Our view on bond markets remains largely unchanged in that we favour corporate credit and that bond prices are unlikely to come under severe pressure for the remainder of the year.
With bond yields narrowing and several global equity markets nearing or reaching record highs, financial markets are starting to look fully valued in several areas. However, with cash and bond yields still at historically low levels the potential return from equities continue to look attractive in our view. In selective areas, relative valuations do not look stretched and maintaining equity weightings seems a sensible strategy for long-term investors.
Although we are not advocates of market timing to guess short-term market trends, it is always prudent to take some profit after a period of strong performance. Investors worried about the current market level as an entry point could consider drip feeding monies into the market, whilst we believe that the best way to manage risk is having a well-diversified portfolio.