Summer Investment Comment 2017
21st August 2017
As we move on in the second half of the year, equity markets are still performing strongly. We continue to receive regular questions about the level of the market and about the potential impact of economic and political uncertainty on investments. Our view is that current market performance is fundamentally driven by global economic growth, and that a well-diversified portfolio allows clients to participate in that growth.
We are delighted to have once again come top in the FT Private Client Wealth Management Survey for 2017, for our five year ‘Balanced’ portfolio performance. Whilst past performance is not a guide to the future, we believe that our investment approach can continue to provide attractive risk-adjusted returns for clients.
Markets have been somewhat volatile since the start of July, with geopolitical tensions causing nervousness amongst investors. The UK All Companies (+0.41%) saw weekly moves ranging from -2.52% to +1.79% during the period, a similar range as the Top UK 100 Companies (+0.15%) and the largest weekly moves in both direction this year. Commentary surrounding a US market correction has intensified following a flight to safety on 10 August, driven by escalating rhetoric between President Trump and North Korea. The S&P 500, Dow Jones Industrial Average and Nasdaq 100 saw significant daily falls of -1.45%, -0.93% and -2.22% respectively, but all three indices remain in positive territory in the period since 30 June.
Europe and Emerging Markets have been particularly strong, after a weak June. In Brazil, the Bovespa (+16.18%) was helped by a strengthening Real and recovery following a political corruption scandal involving President Temer in May. In Italy, the Borsa Italiana (+10.41%) responded well to continued positive economic data. Although Italy still lags other Eurozone recoveries, unemployment continues to fall (11.1% in June compared to 11.8% in January) and growth appears to be returning, with the IMF upgrading its growth estimate for 2017 to 1.3% last month. Sterling continued to slide against the Euro, hitting a level not seen since October last year.
In the US, positive results from Apple sent the Dow Jones Industrial Average above the 22,000 mark for the first time. Other large technology names also rallied, after the profit-taking in June appeared to ease. The FT reported that short interest amongst tech stocks rose by $1.4bn in July, up to $41bn. Tesla is the most widely targeted stock, with short interest >25% of its market cap. Alphabet, Apple and Netflix also appear in the top 5 most-shorted list, compiled by financial analytics company S3 Partners.
In Japan, GDP growth estimates of 4% (annualised) from the Cabinet Office for the April to June quarter significantly beat market expectations of 2.5%. Despite a downward revision in first quarter GDP, Japan is on track for its sixth consecutive quarter of growth, the longest unbroken streak in over a decade.
We still see the potential for further growth, particularly in Europe and Asia. Although UK and US markets have had a strong run, we recommend remaining invested with a long-term horizon. The late summer and early autumn is often a time of short-term volatility in the markets. Whilst political tension always has the potential to escalate, we are yet to see a compelling reason to meaningfully alter our recommended asset allocation strategy.