Cash & Investment Management

Global Equities Q2 2017 – Consolidation of Gains

Wednesday 21st June 2017

It continues to be a challenge to find fresh words for the current global equity bull run. During the second quarter, the impressive first quarter gains were largely built upon as global economic growth continued to show impressive resilience, with improved corporate earnings and receding geo political risks. Global GDP looks set to grow by around 3.8% in 2017 and possibly the same figure in 2018 as well. Unemployment levels have also fallen, with readings in economies such as Germany and Japan at the lowest levels since the early 1990s.

The UK economy continues to be dominated by uncertainty both on an economic level and from a political point of view. GDP growth is relatively weak at nearly 1.5% this year and a slightly weaker figure in 2018. As we highlighted in the last review, this has not stopped the MPC from adopting a more hawkish stance. With a weak currency, it should be no surprise that most of the inflation is imported but it would seem that this threat has already passed. We believe that maybe the MPC are looking more at the effective full employment position and possible credit creation becoming excessive, combined with early signs that the Government austerity programme is coming to an end.

Our stance on the US is also very similar to last quarter with expectations for healthcare and tax reform, combined with higher infrastructure spending receding. Unemployment here has also fallen towards the 4% level, although Federal Reserve officials must be somewhat puzzled by the lack of inflationary pressures. Indeed the reading could well drop below 2%. Valuations remain relatively full by historical standards and there has recently been a more sceptical view by investors on the highflying technology sector. We remain underweight on the expectation that the interest rate tightening cycle goes too far and leads to a H1 2019 downturn.

Europe remains a real bright spot with business and consumer confidence strong, political uncertainty fading and a region wide labour market recovery. Growth for the region should now be nearly 2% for both 2017 and 2018 with some impressive growth in manufacturing activity. The election of Macron in France has added much needed stability and it is interesting that bank credit creation is also improving; this has been a major impediment since the credit crisis. The ECB are in the positive position of seeing inflation continue to lowball and they are unlikely to increase interest rates until mid-2018, although will start to taper asset purchases sooner.

The economic growth rate in Japan has been upgraded since last quarter and the 2017 annualised expansion should now be over 1.5%. The Bank of Japan has recently upgraded the assessment of private consumption and the international perspective. Inflation looks set to average only 0.5% in each of the next couple of years and any interest rate action is now likely to be delayed by about a year to Q3 2018. It is once again positive to see good projections of increase capital expenditure by manufacturing companies with growth forecast to be nearly 4% in spending.

China is probably the only major economy where economic momentum is waning and this in a large part is due to the squeeze on credit growth by the authorities. In the past decade, there have been three periods of monetary policy tightening, which have all led to a squeeze on corporate margins.  Not only has the volume of liquidity declined but also the price has gone up and we need to monitor how the housing market and the banking system are impacted by this. Contrast this with India, where GDP growth is now forecast to top 7% in 2017. Consumer spending continues to recover from the demonetisation, although rising inflation needs to be monitored.

In the US, the S&P 500 index has risen nearly 4%, whilst the Dow Jones is also up 4% with the NASDAQ up over 5.5%, despite some pull back in recent weeks.  Investors remain focussed on US corporate earnings that have been surprisingly good for this stage of the cycle. A major domestic supporting factor is the strong housing market with the associated boost from home equity withdrawal. Gainers on the period included Whole Foods, which was up 45% as a result of a surprise takeover offer from Amazon. Other strong performers included Electronic Arts up 27%, PayPal up 23%, Wynn Resorts up 21% and McDonalds gained 18%. With a pullback in crude oil prices, the Energy sector was weaker, with Transocean down 31% on the quarter. Other fallers included Devon Energy down 25%, Marathon Oil lost 22%, TripAdvisor fell 16% and Signet Jewelers lost 12%.

In the UK, the FTSE 100 has gained 3%, with the more domestic focussed FTSE 250 rising just over 5% and the Small cap market was some 4% higher. It has been fascinating that despite the heightened political uncertainty created by the General Election and the Brexit situation that the economy has remained as robust as it has. There were some strong performers on the period with Berendesen up 36% on news of a takeover approach, EasyJet up 32%, Rolls Royce up 24% and 3i Group rose 22%. On the downside, Petrofac was hit hard losing 55% on claims that the Directors would be convicted of fraud. Others stocks to the downside included Vedanta Resources down 27%, Tullow Oil down 22%, AA fell 18% and ITV declined 16.5%.

Continental European markets have reflected the positivity across the region with economic recovery building momentum. The Euro Stoxx 50 was up nearly 4%, with the German market up 5%, in France the CAC 40 was up 4%, and Italy was up 3%. Major gainers included E.ON up 23% on positive progress on reducing the nuclear liabilities, with Nokia up 16%, Bayer up 13%, Airbus up 8% and Danone up 7%. Amongst the fallers, Ahold in Netherlands fell 18% on competition fears. Other losers included ENI down 9%, Telefonica lost 7%, BASF fell nearly 6% and Adidas was some 2% lower.

Asian equity markets were mixed with China declining on the Central Bank actions, whilst the Nikkei was strong in Japan on a positive economy and weaker currency. For the quarter the Nikkei climbed nearly 10%, whilst China fell nearly 3%, Australia fell nearly 2% on weaker commodities and South Korea rose nearly 10%. Stocks on the rise included Qantas up 41%, Toshiba up 37%, Yamaha up 25%, Boral up 19% and Samsung Electronics was up 17%. Amongst the fallers, Santos lost 22%, Nisshin Steel fell 20%, Westpac fell 13% and Subaru declined 10%.