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Monthly Update | Shares shaken by Trump tweets

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Summary

After a positive month for markets, trade is back at the top of Mr Market’s worry list...

4 min read

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.”
Lilian Chovin, Coutts Investment Strategist

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

    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.
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    Coutts House View

    Equities

    Equity markets rebounded in June and July amid increasingly clear messaging from central banks about lower interest rates and further support for their slowing economies. Medium-term trade tensions and slowing economic growth do still present challenges for risk assets, however.

    Economic data still shows an ongoing slowdown in global economic growth, but we are monitoring our own indicators for any potential stabilisation or reversal.

    In a typical balanced portfolio, our overall equity position is now marginally below neutral after taking some profit on some strong-performing holdings. We are following market and economic data carefully to inform any upcoming changes on that front.  

    Over the year we have tilted our allocation towards developed markets, gradually changing focus to regions that look more attractive in a slower-growth environment. We still have a small, active position in UK equities based on attractive dividend yields and substantial under-investment by foreign investors due to Brexit uncertainty.

    With a new government in the UK, the Brexit process has come to the fore again. Most of our UK investments are in large, international companies which are more insulated from Brexit developments, and we dialled down our exposure to domestic equities in the last month.

    We continue to hold a small exposure to emerging market equities. While we continue to monitor developments in trade negotiations between the US and China, we see the strengthening US dollar as a headwind for emerging market assets – for now. If the dollar continues to rise, we suspect the US administration would become increasingly uncomfortable with such a strong currency. And any action they take to weaken the dollar would potentially be positive for emerging market assets.

     

    Positioning

    US -
    UK +
    Europe =
    Japan -
    Emerging Markets -

    Bonds

    Government bonds provide valuable diversification benefits, particularly in volatile markets and amid slowing economic growth with low inflation. We increased our investment in US and UK bonds throughout 2018 and this year. Investors had priced-in several interest rate cuts by the US Federal Reserve and other central banks in the second half of the year, and this supported bond prices.

    Outside of developed market government bonds, we continue to invest in specialised credit themes – such as subordinated financial credit and emerging market debt – based on attractive valuations and income, and positive prospects over the medium term. In emerging market debt, we hold local currency government bonds and short-dated US dollar-denominated corporate bonds.

     

    Positioning

    Government -
    Investment Grade -
    Financial Credit +
    Emerging Market Debt +

    Other Assets

    We have reduced our investment in UK commercial property recently as the return potential has grown less attractive.

    Absolute return strategies had a difficult 2018 and our conviction in their value as diversifiers in difficult markets has diminished, although we continue to hold some alternative investments, mostly linked to specific investment themes instead of broader funds.

     

    Positioning

    Absolute Return +
    Property +

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.

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.

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