May 2019 Market Report
During one-month period to 30th April 2019, major equity markets registered reasonable gains, the FTSE ALL-World Index rose by 3.79% overall and has now risen by 15.67% since the beginning of the year. The VIX index fell 2.81% to end the period at 13.48. Fixed interest products displayed a mixed performance, with UK gilt prices and US Treasury prices declining, while several more speculative grades rose in price terms. Sterling showed little movement over the month but remains ahead of most major currencies since the year-end. Precious metals had a mixed month while oil rose, largely on supply related issues.
The European Central Bank responded to slowing economic growth by maintaining interest rates at current low levels and announcing a new round of bank loans. Political events were not in short supply as Macron, in France, continued to face civil unrest and other governments faced growing nationalist pressures. The recent Spanish election returned Pedro Sanchez, but his Socialist Party failed to obtain an overall majority. It should also be remembered that The EU faces important elections in May. US market watchers continued to grapple with ongoing tariff discussions (China,and prospectively Europe), Federal Budget concerns, Iranian sanctions,Venezuela, North Korean meeting stalemate and Trump’s personal issues(Mueller, etc). US economic data has indicated a solid trend although corporate results/forward looking statements have taken on a more cautious tone. Official interest rates were increased in December to a range of 2.25%-2.50% much as expected, but recent Fed minutes and statements, point to a much more dovish stance. In the Far East, China flexed its muscles in response to Trump’s trade and other demands while relaxing some bank reserve requirements and contemplating other measures to help the slowing economy. Japanese economic data reflected a recent bout of natural disasters while Shinzo Abe consolidated his political position. At the Bank of Japan meeting, the current easier fiscal stance was reconfirmed.
The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation as expected, but poor relative GDP figures (just 0.3% growth 3 months to end February) and deteriorating property sentiment, both residential (esp London) and commercial (especially retail).Business and market attention, both domestic and international, is clearly focussed on ongoing BREXIT developments and their strong influence on politics. Both the Chancellor and Bank of England Governor have made frequent references to the unsettling effects of any unsatisfactory Brexit outcome. The actual situation remains very fluid, and although the “decision time” has been lengthened, this itself brings further political issues (e.g. MEP elections) and distorted, economic /corporate indicators. On the positive side, the threat of an imminent” no deal” has receded.
Aggregate world hard economic data continues to show 2019 expansion of around 3.0%, although forecasts of future growth have been reduced in recent months by all the leading independent international organizations. Very recent European and Chinese data MIGHT alleviate fears of a sharp slowdown. Fluctuating currencies continued to play an important part in asset allocation decisions, volatile sterling being a recent example, while some emerging market currencies have been exceptionally volatile e.g. Turkey.
Global Equities rose 3.79% over April, the FTSE ALL World Index gaining an impressive 15.67% since the year end, albeit following a very weak quarter. The UK broad and narrow market indices, both rose by about 2% over the period, but lag world equities, in local currency, since the beginning of 2019. Japan and Germany both posted relatively strong performances, ahead of the UK but behind the USA since the year end. The VIX index, which has declined 46.97% since 31st December, now stands at a level of 13.48.
Sector moves over April 2019 featured strength in the areas of Industrials, Banks and Life Assurance, while Pharmaceuticals and Mining showed negative absolute returns Over the four-month period, Mining, Consumer, Industrials and Life Assurance now lead the UK sectors. First indications show that “average” UK All Company unit trusts (+13.92%) are out- performing the major indices so far this year Source (Trustnet). Balanced funds, however, are showing four month returns of between 5% and 10%, so far, before expenses, depending on risk attitude, largely reflecting the weight of Fixed Interest.
Gilt prices fell over the month, the 10-year UK yield standing at 1.12% currently. Other ten-year yields closed the month at US, 2.53%, Japan, -0.07%, and Germany -0.1% respectively. UK corporate bonds, by contrast, rose 0.21 % in price terms ending April on a yield of approximately 2.59%. Amongst the more speculative grades, there were gains for US High Yield and Emerging Market bonds. Floating rate bonds and convertible bonds also rose in price terms. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (many yielding around 6%) from over 10 different asset classes is available.
A quieter month for the major currencies, despite the political and economic “noise”. Sterling still remains one of the major performers year to date. Currency adjusted, the FTSE World Equity Index ended the four-month period up 13.01%, some 3% ahead of the FTSE 100.
A generally mixed period for commodities with oil showing supply related gains, renewed firmness in platinum and palladium but declines in the gold price, now virtually unchanged over the four-month period. Since the beginning of this year, oil and iron ore still show significant double-figure price gains.
Over the coming months, geo-political events and Central Bank actions/statements will be accompanied by the ongoing first quarter reporting season, where forward looking statements will be scrutinised even more than the historic figures, at this advanced stage in the cycle. To some extent, the, slower economic growth forecasts that are appearing, will inevitably lead to some scale-back in corporate profit projections, although there may be offsetting fiscal and monetary effects. It will also be interesting to see if recent bond yield declines and yield curve inversions are accentuated.
US watchers will continue to speculate on the timing and number of interest rate moves during the 2019/2020 period while longer term Federal debt dynamics, election debate and trade” war” winners/losers will affect sentiment. Corporate earnings growth will be subject to even greater analysis after a buoyant 2018, amidst a growing list of obstacles. Additional discussions pertaining to North Korea, Russia, Ukraine, Iran, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment may be calmer after recent political and economic events although international events e.g. exchange rates and tariff developments, will affect equity direction. On a technical note it should be noted that The Japanese equity market will be closed until 7th May, which could lead to erratic FX trading. There is increasing speculation that China may announce more stimulative measures. European investment mood will be tested by economic figures, EU Budget discussions, Italian bond spreads, German, French and Spanish politics, and reaction to the migrant discussions. It should also be remembered that EU elections and change of ECB Chairman are expected this year.
Hard economic data and various sentiment/residential property indicators are expected to show that UK economic growth continues to be lack-lustre and any economic upgrade over current quarters appear extremely unlikely. The UK Treasury and the MPC have both produced rather negative economic medium-term projections, whatever the Brexit outcome! It is highly likely that near term quarterly figures (economic and corporate) will be distorted (both ways), and general asset price moves will be confused, in my view, by a mixture of currency development, political machinations, international perception and interest rate expectations. Mark Carney has a dilemma!
On a valuation basis, most, but not all, conventional government fixed interest products appear expensive against current economic forecasts and supply factors and renewed selective bond price declines and further flat performance should be expected in the medium term, in my view.However,sharper than expected economic slowdown forecasts, and any equity volatility could support bond prices from time to time.
Equities appear more fully valued after the recent rally, but there are wide variations. Equity investors will be looking to see if slowing earnings growth and growing global headwinds are compensated for by a more dovish interest rate environment.
In terms of current recommendations,
Depending on benchmark, and risk attitude, first considerations should be appropriate cash/hedging stance and the degree of asset diversification (asset class, individual investment and currency).
An increased weighting in absolute return, alternative income and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate, including some outside sterling. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are still rather high. Ongoing and fluid tariff discussions, as well as growing regulation could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers, Chinese exporters, selected US tech shares etc etc.
Full quarter report available to clients/subscribers and suggested portfolio strategy/individual recommendations will be available soon. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, defensive list, hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
1st May 2019