Monthly Update | Shares shaken by Trump tweets
After a positive month for markets, trade is back at the top of Mr Market’s worry list...
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Contents
It wasn’t just the temperature that went up in July as global stock markets rose, with America’s S&P 500 reaching an all-time high at one stage.
However, the direction of global trade continues to be a concern for investors. At the end of the month, President Trump took to Twitter to express dissatisfaction about the pace and direction of trade negotiations with China. Markets took the news very badly, with substantial falls across the world during the next day’s trading. The first days of August saw President Trump announce further tariffs against China, adding fuel to negative investor sentiment.
Central banks turn up the support as growth slows
If this was the month’s bad news, the good news came in the shape of supportive announcements by all the major central banks. This included the US Federal Reserve lowering interest rates for the first time since 2008. Their 0.25% cut came in response to the slowing growth and greater uncertainty over trade. The central bank has therefore made it cheaper for businesses to borrow to help boost their bottom line, and for consumers to spend rather than save to help energise the economy.
Meanwhile, the European Central Bank has indicated it could reignite its bond-buying programme – otherwise known as ‘quantitative easing’ – to pump money into the financial system and help stimulate growth. And the Bank of Japan has said it would act to aid its own country’s economic recovery “without hesitation”. On 1 August, the Bank of England kept interest rates unchanged at 0.75% but cut its growth forecast for the UK to 1.3% for this year and next.
In light of all this, at Coutts we remain positive about equity markets, but cautiously so. Trade remains a concern, of course. We also see the gradual, global economic slowdown continuing, so have been positioning our portfolios more defensively this year. This has included reducing our allocation to equities, taking profit from shares that have performed well, and buying more bonds, although overall our positioning still shows a bias toward stocks.
You are what you earn
US earnings season got underway in July with the country’s largest companies reporting their second-quarter profits.
Overall, at the end of July, 75% of US companies had announced their financial results and 76% of them had beaten expectations, with 60% doing better than expected on their top line sales.
The actual profit numbers themselves were a little lower than previous quarters, but it’s worth remembering that any falls follow a massive boost in earnings last year powered by President Trump’s tax cuts.
The positive effects of those cuts now seem to have run their course, but we are still seeing some strong success stories. Tech firms like Microsoft and Alphabet, which owns Google, continue to thrive, for example.
Britain, Brexit and Boris
Boris Johnson’s appointment as Britain’s new Prime Minister meant new battle lines drawn around the Brexit negotiations. Mr Johnson’s government said the UK leaving the European Union without a deal – previously seen as unlikely – was now “a very real prospect”.
Markets were not moved significantly by Mr Johnson getting the top job in British politics as it had been expected since the start of the Conservative Party leadership contest. But investors remain nervous about the UK while Brexit-related uncertainty deepens.
“As international investors based in the UK, we at Coutts use sterling to invest in companies all over the world on our clients’ behalf – and a lower pound makes these investments more valuable.”
Sterling has slipped severely in light of the increased likelihood of a no-deal Brexit, bad timing for Britain’s holidaymakers. At one stage the currency reached a two-year low against the US dollar, and has sunk to levels close to what we saw immediately after the European Referendum in 2016.
But as Coutts Investment Strategist Lilian Chovin points out, sterling’s big drop isn’t necessarily all bad for investors.
“Earnings for the globally focused companies in the FTSE 100 get a boost when the pound falls, which is usually good for share prices,” he says. “Also, as international investors based in the UK, we at Coutts use sterling to invest in companies all over the world on our clients’ behalf – and a lower pound makes these investments more valuable.”
In light of the increased uncertainty, we recently dialled down our investment in domestic UK stocks and increased our investment in the more globally-focused FTSE 100. Such stocks benefit from the current weak sterling as the money they make overseas becomes worth more when translated back into the UK’s currency.
Emerging markets continue to struggle
Emerging markets have had a challenging year so far. Typically, the export-focused developing economies are more vulnerable to slowing growth than developed nations, and also suffer more from friction in global trade. This has certainly been in evidence this year, and is reflected in equity markets, but results have been highly localised.
While stock markets in China and Russia are performing well, South Korean equities are struggling as Japan’s export restrictions on high-tech materials to Seoul have affected investor sentiment. We reduced our overall exposure to emerging markets in general in 2018, but have retained modest exposure to Chinese and Russian equities, which benefitted our portfolio performance.
The numbers
In July, the MSCI All Countries World Index rose by 0.9%. This translated to a 4.3% rise for sterling investors, as pronounced sterling weakness boosted the value of assets denominated in other currencies. The Barclays UK Treasury Index returned 2.2% over the month, with UK investors seeking safety from the possibility of a no-deal Brexit, while strong equity performance over July saw US Treasuries return -0.1%.
Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment.
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Market Performance
Market Performance
Important: This graph shows a very isolated period of past performance. For further context of historic performance over the last five years, please click on the “Equity Markets Performance” heading above. As always, past performance should not be taken as a guide to future performance.
Equity Markets
Performance (%tr*, local)
12 month performance to end June
As of: 31-Jul-19
Current
-1M
-3M
YTD
2019
2018
2017
2016
2015
Developed Equity (MSCI)
1,681.0
1.2
1.2
31.5
7.3
11.5
19.5
-2.1
9.0
MSCI UK
2,182
2.1
3.2
17.7
1.7
8.3
16.7
3.4
-0.2
MSCI UK Large Cap
1,078
1.9
3.3
18.4
2.9
8.2
16.8
5.4
-2.4
S&P 500
2,980
1.4
1.7
40.1
10.4
14.4
17.9
4.0
7.4
Nasdaq Composite
8,175
2.2
1.3
56.1
7.8
23.6
28.3
-1.7
14.4
DJ EuroStoxx
375.9
0.2
-0.2
17.5
3.1
4.3
25.6
-10.8
12.1
Nikkei 225
21,522
1.2
-3.1
18.4
-2.6
13.5
31.1
-21.6
35.7
Hang Seng
27,778
-2.3
-4.5
39.3
2.5
16.3
27.8
-17.5
17.6
Emerging Equity (MSCI)
57,226
-0.9
-3.1
29.2
2.2
10.9
22.2
-7.3
6.6
BRIC (MSCI)
677.9
-1.0
-3.6
42.6
3.2
20.2
24.7
-14.1
14.1
Source: Datastream, all returns in local currency; *tr=total return, including reinvested dividends.
Bond Markets 10-year yield* Performance (%, local) 12 month performance to end June As of: 31-Jul-19 -1M -3M YTD 2019 2018 2017 2016 2015 US Treasury index 2.01 -0.3 2.6 2.5 5.0 -2.8 -4.6 3.7 -0.2 UK gilts index 0.61 2.5 4.9 2.4 2.7 -1.1 -4.1 10.9 6.3 Eurozone govt bond index -0.48 0.9 5.4 -1.1 4.7 -8.8 -2.8 7.3 -6.1 US investment grade index 3.16 0.2 3.5 2.9 6.7 -5.1 -2.4 3.6 -4.4 US high yield index 5.88 0.1 0.6 -0.2 1.5 -3.5 6.3 -3.0 -6.9 Emerging market index 13.80 1.2 4.6 -20.2 -17.1 -4.0 0.0 23.9 -5.8 Source: Barclays indices; Datastream; *current yield on benchmark 10-year Treasury, gilt and bund respectively.
Equity Markets
Performance (%tr*, local)
12 month performance to end June
As of: 31-Jul-19
Current
-1M
-3M
YTD
2019
2018
2017
2016
2015
Commodity index (TR) 166.7 -0.7 -1.4 -5.8 -6.8 7.3 -6.5 -13.3 -23.7 Brent oil price (spot) 64.1 -5.1 -11.3 16.1 -12.9 64.6 -2.3 -20.5 -45.3 Gold bullion (spot, per ounce) 1428 1.1 11.3 23.3 12.9 0.6 -5.9 13.0 -11.2 Industrial metals (TR) 241.7 1.4 -2.6 10.6 -11.0 15.2 17.5 -11.5 -19.4 Source: Datastream
Inflation & Interest Rates Current Inflation (%) Interest Rate Forecasts (%) Rate Announcement Current November January Next Date United States 1.7 2.25 1.75 1.00 18-Sep United Kingdom 2.0 0.75 0.50 0.50 19-Sep Eurozone 1.1 0.00 -0.10 -0.20 12-Sep Japan 0.7 -0.10 -0.20 -0.20 19-Sep Source: Coutts & Co.
Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up and you may not recover the amount of your original investment.
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Key Takeaways
We are seeing reasonably positive conditions for investors at the moment, despite slowing global growth. Stock markets continue to rise largely because of supportive central banks, and bonds are benefitting from low interest rates. Brexit uncertainty and the US-China trade dispute remain the biggest headwinds, however, with a reopening of hostilities by President Trump knocking investor confidence at the end of the month.
At Coutts we remain cautiously positive about equity markets. We see the gradual, global economic slowdown continuing, so have been positioning our portfolios more defensively this year.
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.
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