Monthly Investment Perspective
Markets remained subdued after the surprise result in the general election
6 min read
The surprise election result, which saw the Conservatives fail to win a majority, dominated headlines in June.
Sterling weakened by 2% on the news, while the FTSE 100 gained 0.5%. However, the broader reaction from markets was relatively calm against a backdrop of global growth.
Both the S&P 500 and Dow Jones indices reached record highs during the month, but equities were relatively flat on a global view, with the MSCI World Index rising by 0.2%, translating to a loss of 0.2% in sterling terms. Volatility hit UK gilt markets, with 10-year yields reaching 1.2% at the start of June before falling to around 1% at the end of the month.
The world economy continues to strengthen, with the Organisation for Economic Co-operation and Development (OECD) predicting growth of 3.5% in 2017. Despite concerns over Brexit, the World Bank has upgraded its forecasts for UK growth to 1.7% this year from its previous forecast of 1.2% in January.
UK inflation reached its highest point in almost four years in May, climbing to 2.9% year-on-year as costs increased for recreational and cultural goods and services. While the Bank of England’s (BoE’s) Monetary Policy Committee kept interest rates on hold at 0.25% at its June meeting, the vote was split three to five, the first time there had been more than one dissenting vote for many months.
Governor Mark Carney later commented that a shift away from easy monetary conditions may become appropriate as macroeconomic pressures normalise. As a result 10-year gilt yields jumped by over 20bps and sterling strengthened against the dollar touching US$1.30.
Positive messages from the European Central Bank sparked a fairly dramatic reaction within markets. 10-year German bund yields rising 12.5bps to reach almost 37bps on the day. The euro also strengthened against the dollar.
Across the Atlantic, the US Federal Reserve (Fed) raised its key interest rate for the second time this year, to 1.25%, a new high-tide mark since the aftermath of the financial crisis in 2008. The Fed said continued US economic growth and the growing jobs market were behind the rate rise, and that it would begin cutting its bond holdings and other securities later this year.
Our latest market performance data:
Performance (%tr*, local) As of 30-June-17 Current -1M -3M YTD 16 Developed Equity (MSCI) 1,445.5 1.4 4.4 6.8 9.6 FTSE All Share 3,962 -0.5 2.9 3.6 16.8 FTSE 100 7,204 -1.5 1.6 2.3 19.1 S&P 500 2,384 1.2 4.4 7.2 12.0 NASDAQ Composite 6,048 3.0 7.2 12.7 8.9 DJ EUROSTOXX 381.4 3.7 8.5 9.8 5.0 NIKEEI 225 19,197 0.7 -0.6 1.2 2.4 Hang Seng 24,615 1.1 5.9 12.5 4.3 Emerging Equity (MSCI) 52,328 1.6 5.3 10.3 10.1 BRIC (MSCI) 567.6 1.4 5.0 11.8 8.2 SOURCE: Datastream Performance shown as % total return in local currency terms. *tr=total return, including reinvested dividends.
Inflation & Interest Rates Current Inflation (%) Interest Rate Forecasts (%) Rate Announcement Current June Sept Next Date United States 2.4 1.25 1.00 1.25 14-Jun United Kingdom 2.3 0.25 0.25 0.25 11-May Eurozone 1.9 0.00 0.00 0.00 08-Jun Japan 0.2 -0.10 -0.10 -0.10 15-Jun Performance (%tr, local) As of: 30-June-17 10-Year Yield* -1M -3M YTD 16 US Treasures 2.28 0.6 0.6 0.6 -1.4 UK Gilts 1.02 0.5 3.2 0.8 7.9 Eurozone Government Bonds 0.32 1.2 3.1 3.3 -1.4 US Investment Grade 3.24 0.8 0.8 0.7 1.8 US High Yield 5.63 1.3 0.8 1.7 12.0 Emerging Market 5.47 3.6 4.2 1.5 9.4 Source: Barclays Indices; Datastream
*CURRENT YIELD ON BENCHMARK 10-YEAR TREASURY, GILT AND BUND RESPECTIVELY
PERFORMANCE SHOWN AS % TOTAL RETURN IN LOCAL CURRENCY TERMS
*tr=total return, including reinvested dividends.
Performance (%, Dollar) As Of: 30-June-17 Current -1M -3M YTD 16 Commodity Index (TR) 170.2 -1.0 -4.3 -3.8 11.8 Brent Oil Price (spot) 50.4 -1.1 -8.1 -8.7 51.6 Gold Bullion (spot, per ounce) 1268 1.0 6.7 9.5 9.0 Industrial metals (TR) 227.3 -3.8 -1.3 4.0 19.9 Source: Datastream
Spotlight on the technology sector
Investors have been buying technology stocks in preference to industrial companies this year as enthusiasm about President Trump’s ability to enact his economy-boosting election promises faded. Tech stocks can be popular when the outlook is uncertain as their growth prospects are less correlated with the strength of the underlying economy than many other stocks.
Several months of strong returns in the sector have been driven by the five largest companies –Facebook, Amazon, Netflix, and Google’s parent company Alphabet – which have earned the label FANGs. This concentration has caused some concerns about the sustainability of valuations.
In the first half of June, the sector suffered a sharp correction, falling almost 4% on the back of a research report from Goldman Sachs warning of growing risks in the sector. The investment bank highlighted that almost 40% of the gain in the entire S&P 500 Index this year is attributable to these five tech stocks, even though they make up just 13% of the index’s market value.
However, we are not worried about this sell-off and the tech sector has already started to recover from this dip. Although investors are asking questions about valuations, historical analysis shows that valuations aren’t too high in our view. We don’t see this as a cause for concern, but rather some much needed profit taking after a very strong start to the year.
Technology is one of the best-performing sectors so far in 2017, which has been boosted by healthy profits. The latest results confirm the strong underlying growth trend as many tech companies continue to beat their earnings forecasts. They are supported by strong balance sheets and healthy margins.
The potential for new technology to “disrupt” entire markets and industries across the global economy remains one of our long-term investment themes. We prefer to gain exposure through actively managed funds run by specialist managers that have a depth of industry and company knowledge. This brings an ability to focuse on companies with robust business models, high barriers to entry, strong balance sheets, attractive valuations and strong management teams.
Spotlight on the healthcare sector
Investor sentiment shifted in 2016 - from fears of deflation to expectations of inflation, owing to a rebound in oil prices at the start of the year and then the surprise election of President Trump and his economy-boosting promises. As a result, healthcare stocks lagged behind the broader market as investors favoured more cyclical sectors, such as energy, industrials and financials.
Political uncertainty associated with drug pricing also affected the sector after both US presidential candidates questioned drug company practices. However, many of these shorter-term concerns have faded and there have been repeated setbacks for Trump’s effort to replace Obamacare – officially known as the Affordable Care Act.
More recently, the pharmaceuticals and healthcare sector has stabilised although investors remain underinvested. It combines attractive valuations with a positive fundamental outlook – demand for health services around the world continues to rise and President Trump has promised a robust system of deregulation that could lead to impressive growth, especially in biotechnology.
We believe the long-term fundamentals for the sector remain attractive and have taken advantage of recent weakness to increase our allocation across portfolios and funds. Earnings and sales are improving steadily and valuations remain cheap by long-term standards – traditionally, this sector trades at a premium to the broader market.
Looking ahead, the healthcare sector should, in our view, continue to benefit from demographic tailwinds around the world as populations age and people live for longer. Demand for medical care is expected to increase in developed countries and emerging markets where the middle classes are rapidly expanding.
Rising demand and associated spending are also being driven by the prevalence of chronic diseases as well as increasing patient awareness, knowledge and expectations. Meanwhile, costly clinical innovations and other technological developments should continue to provide plenty of opportunities for investors.
Coutts House View
US - UK - Europe + Japan + Emerging Markets +
The outlook for global equities continues to be positive, supported by a strong US economy and upward revisions to forecasts for global growth from the International Monetary Fund. US incomes continue to rise at a modest pace, contributing to consumer spending and growth. President Trump’s plans for cutting taxes and spending on infrastructure could also reinforce domestic growth longer-term should they get through the US congress. However, we see US equities as highly valued.
We believe that UK equities will continue to be supported by a strong economy based on continuing healthy retail and jobs data. While fears of a post-Brexit recession continue to fade, political uncertainty remains after the shock general election result left the UK with a hung parliament . In our view the government is now more likely to pursue a softer stance towards Brexit negotiations which could prove to be supportive for UK businesses.
We have taken some profits in global equities that have delivered strong returns off the back of sterling weakness and redeployed the proceeds into assets denominated in sterling, which we believe will recover from its historically low level.
Within international equities, we favour Europe, emerging markets and Japan on relatively attractive valuations compared to other major markets and strong global economic activity. We see both as offering superior earnings growth potential supported by an improving manufacturing sector.
Government - Investment Grade - High Yield + Emerging Market Debt +
Our general view of bonds versus equities is that the latter provide the potential for better long-term returns. Although bonds have attractive diversification qualities, we are cautious on government bonds, believing long-term returns could be poor and vulnerable to rising interest rates. The US Federal Reserve has hiked the US reference rate twice so far this year and there is the potential for a further rise before the end of the year. In the UK, we believe rates will remain low for some time although we see the possibility of the emergency Brexit rate cut being reversed at some point.
Within bonds, we prefer credit over government, and continue to favour financial credit as a theme. Earlier this year we added emerging market local currency debt to portfolios and funds which we saw as attractively valued for the level of yield available and with the potential to benefit from local currencies appreciating against the US dollar. We believe markets over estimated the protectionist risks presented by President Trump.
Alternatives Equity Themes Commodities - Energy + Absolute Return + Technology + Property + Banks + Healthcare +
We are modestly underweight commodities, and in particular we see limited upside for gold. We are broadly neutral on oil. Despite an agreement among the OPEC nations to reduce oil production at the start of the year, we still see oversupply as an issue but demand is growing in emerging markets led by India and China.
While we see some near-term headwinds within UK commercial property, our view towards this sector remains positive in the long term. Economic growth continues to be supportive and Brexit risks are discounted in the price, so we are maintaining our property overweight.
Alternative asset types with a low or negative correlation to equities can help mitigate the risk of large falls in equity markets and continue to be attractive in our view. For example, absolute return strategies, which we favour, have the potential to make money in a range of market environments.
About Coutts investments
With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.Discover more about Coutts investments