Cash & Investment Management

Global Equity Review – Q3 2016

Tuesday 27th September 2016

The latest quarter has probably been a surprising one for investors in global equities, in that positive returns have been in abundance for a Sterling based investor. The EU Referendum sent the currency down sharply (currently down 12.5% since the vote) which will probably lead to higher inflation levels in due course. The Bank of England were so concerned by the prospect of a recession, that they cut interest rates in early August to 0.25%. With further QE, the Central Banks continue to dominate the markets, although volatility was very low over the summer months.

UK economic growth will be around 1.6% in the current year, falling to zero for 2017. The main problem is that it is still totally unclear when Article 50 will be invoked and so people are trying to act ‘normal’. There must be spill over effects and we continue to hear that capital expenditure is muted, not to mention the property sector impact. The FTSE 100 index is a global one and Blue Chips have performed well, combined with the desperate search for yield.

Broadly, US equities have continued to perform well, although the large proportion of the gains in the last quarter came from the technology sector. If we exclude consumption, US GDP growth is actually negative and every time this has happened since 1945 there has been a recession. Productivity growth remains a major challenge with readings consistently less than 1%. Equity ratings are high and margins are under pressure. We have made no secret that we have reduced exposure to the region.

Continental Europe has continued to see the economic recovery (1.5% for 2017) on track but it has certainly lost momentum in the wake of both the Brexit vote and also future political challenges. German industrial production has struggled and deflation across the region remains a real issue. However, relative to the US, GDP growth is faster and so domestic growth stocks still look attractive.  Some of the cyclical stocks have already performed well and we would caution chasing them. Global investors should also experience somewhat of a yield pick-up.

Japan has produced better returns this period, again driven by the Central Bank and the prospect of widened QE, although possibly no imminent increase in the negative interest rate. Authorities still need to get inflation going and are targeting banks to boost levels of lending. There have been more positive signs in the capital goods sector.

The last few months have seen a mini re-acceleration in the Chinese economy as the State spending was front end loaded for the year. Indeed, the government deficit has grown to 4%. The housing sector is also supportive with decent prices rises and low inventory levels. GDP growth in 2017 should therefore hit between 6-6.5%. Both retail and car sales are rising at very healthy levels, close to 10% which also bodes well.

In the US, the S&P 500 index has risen 3.7%, whilst the Dow Jones is up 2.5% but the star is the NASDAQ which is up over 10% on the quarter. Positive technology stocks have included Seagate up 50% as storage and big data becomes a pressing long term issue. Other gainers included EBay up 38%, Micron Technology up 28% and Teradata up 22%. Energy also continued to bounce with Chesapeake Energy up 60% and Devon Energy up 16%. Concern over State subsidies led to falls in some of the solar energy stocks, notably First Solar down 27%. Other fallers included Campbell Soup down 17%, Dollar Tree lost 15% and Whole Foods declined nearly 11%.

In the UK, the FTSE 100 has gained 6%, whilst the FTSE 250 has rallied nearly 10% after being hit hard in the immediate aftermath of the Brexit vote. Interestingly the smaller company, AIM index was up 15%, to now stand at similar year to date gains as the Blue Chips. Miners were back in vogue as China appeared to stabilise, Ferrexpo stood out climbing 150%, whilst Hochschild Mining was up 58% and Vedanta was up 33%. Other gainers included Metro Bank up 53%, Galliford Try up 44% and Wetherspoon up 33%. There was weakness in some of the oil stocks with Tullow Oil down 12% and Cairn Energy losing 10%. Other notable fallers included Pearson down 21% on US trading fears and CMC Markets also down 21% on the lack of volatility impacting trading volumes.

Continental European markets were robust with France up 5.75%, the German DAX rose nearly 10% and Spain was up 7.75%. The only real area of weakness remained Italy which only rose 1.5%, as the troubles of the Financial sector continued to overshadow the economy. Gainers over the period included the fashion website, Yoox, which was up 38%, Credit Suisse was up 26% and Peugeot rallied 25%. On the negative front, Ingenico dropped 24% as the payments processor struggled in Brazil and with a new type of US credit card. Other losers included Sanofi down 9% and ENI down 14%.

Asian equity markets completed the strong picture for the quarter with Japan rallying 8%, India was up 6%, and Hong Kong gained nearly 14%, whilst China lagged to some extent only up 3%. Nintendo was a star performer up 86% with the launch of Pokémon Go. Other risers included Brother Industries up 60%, Nippon Paint was up 38% and Korean Air Lines climbed 31%. Amongst the losers, Noble Corp fell over 30% on trading losses with Ryohin Keikaku down 19% and HTC Corp was also down 19%.