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1 August 2016

Finance and investment wrap - August 2016

By Clive Hale, Director

July has been all about the referendum outcome, with equity markets continuing to regain their poise despite Brexit concerns globally – legitimate or otherwise. The International Monetary Fund has lowered its global economic growth forecast, Bank of England governor Mark Carney is on the verge of cutting rates, and the new chancellor has said he is considering cutting corporation tax.

On the trade front, countries as diverse as China, New Zealand, Canada, India, the US and Iceland all appear happy to open negotiations with the UK. Without the EU bureaucracy, the Transatlantic Trade and Investment Partnership may well have been signed long ago; that may turn out to be a blessing in disguise!

Brexit aftermath: growth and inflation prospects for the UK

The US Federal Reserve (the Fed) meanwhile remains in a painted corner. Having raised rates last December, with a promise of more of the same, they have been back pedalling ever since. If Carney does cut UK rates, he may encourage the Fed to finally do likewise. Neither course of action would do much for the benefit of the pound or the dollar, but would go down very well in the emerging and commodity-producing economies of the world.

Five funds to help you invest in emerging markets

As we said last month, any significant market correction has been postponed, it would seem, as the central banks continue to back stop the markets. The other major concerns pre-referendum were the Chinese 'devaluation', which has been proceeding stealthily while attention has been drawn elsewhere, and concerns over the European banks, where stealth too is being applied in Italy thus far, but open warfare could erupt at any moment. We must remain ever vigilant.

United Kingdom

Many FTSE 100 stocks were destined to do well as the pound underwent its Brexit 'adjustment', but the surprise has been the resilience of the small- and mid-cap stocks, which are pushing up towards all-time highs again. This doesn’t seem to make any sense, but that can be said about most market action since the central banks started 'running the casino'.

We have a new PM who has made some 'interesting' cabinet appointments. Davies and Fox to help us on our way out of the EU and Boris to redesign the concept of diplomacy at the foreign office. Article 50 is yet to be invoked and while all is complacent after the event, there are some important decisions to be made with the usual far-reaching and unforeseen consequences. With the Bank of England due to lay an egg later this week, we wait with some trepidation for the outcome and sincerely hope they aren’t following in the Bank of Japan’s footsteps.

Will central banks resort to helicopter money?

United States

In the US, we now have another three months of electioneering to endure. The polls have Clinton and Trump neck and neck, but post-Brexit they have little valid powers of prediction. Economic data is positive, but anaemic; second quarter economic growth looks to be coming in significantly below the forecast of only a few weeks ago.

The US markets are taking a breather but the signs are that we may see another leg up, which may be the last hurrah before the weakness of the economy finally sinks in. Whether the Fed can keep the plates spinning or begins to be viewed as the cause of the malaise remains to be seen. At present, the lack of market volatility suggests the former.

Meanwhile US treasury bond market movements are suggesting, bizarrely, that rates are more likely to fall than to rise – the convoluted logic being that lower rates mean folk will be less desirous of US dollars and therefore demand for treasury bonds will be deficient.

How should you invest in the US this year?

Europe

European markets have not recovered their poise as well as the UK or the US, suggesting that the grindingly slow recovery will be further hampered by exit machinations.

Given the solvency issues in the banking sector, it is in some ways surprising that European equities have not fared worse.

Japan

Over the past few days Japanese bond yields have been on the up after the Bank of Japan (BoJ) governor, Haruhiko Kuroda, publicly questioned the efficacy of the BoJ’s monetary policy. So rather than getting another shot of quantitative easing, the market received a cold shower instead. The yen continues to strengthen, which defies logic – as defined by the BoJ that is. There is value to be found in this market, but patience is required.

Japan: Is Abe's fiscal stimulus really helicopter money in disguise?

Asia Pacific and emerging markets

China’s slowdown is still a concern, as is the ongoing devaluation that is exporting deflation to the rest of the world. The Chinese market is still being propped up by the government but other Asia and emerging markets have generally done a lot better. India has been especially strong.

Commodities and gold

Gold has shown its risk off characteristics no more so than in sterling terms and an exposure to mining stocks would have paid off handsomely over the Brexit period. In the short-term, I believe it is over-extended and a correction is underway.

The oil price has reacted at the US$50 level. At these levels, US shale starts to become economical again, but of course increased supply should just keep a lid on prices.

Energy investing right now: pros and cons

Bonds

Having spiked down to an all-time low yield, the 30-year US treasury has tentatively moved back up again. This is the chart to watch.

It won’t help to determine the direction of interest rates but the stock markets will be concerned if it starts heading back to 3%, which is where it started the year … all that time ago!

Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive's views are his own and do not constitute financial advice.

©2016 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre, shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.