Investments

Market review - investors react to Trump

Andrew Milligan

As we move into the second half of the year, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, discusses what’s driving markets including the global response to President Trump’s twitter feed, whether we’re beginning to see a decoupling of developed and emerging markets and whether the Bank of England will finally raise UK interest rates.

 

Trump’s twitter feed sends shock waves around the globe

President Trump continues to follow through on all his campaign promises and, quite rightly, investors are concerned about the potential implications of his actions.

Operation ‘Make America Great Again’ involves a whole series of steps on tariffs, on military policy, on relations with its allies, on controlling technological flows and on tackling immigration. All of which the financial markets are trying to understand and price correctly. A task made more difficult by the 140 character limitation of a tweet which doesn’t allow much room for the all-important details.

This is one of the reasons why day-to-day volatility in financial markets is higher than in 2017.  On days when investors focus on the strong economy and company profits, we see share prices rise, and when politics dominate the headlines, we see many investors retreat to the sidelines.

What trade tariffs mean for markets

EU tariffs on US goods have come into force, President Trump is set to retaliate and oil prices have risen. But what does this mean for markets?

The fact is, there are some complicated drivers at work here. The tariff proposals from the US, EU and China are not yet large enough to have a material effect on the world economy, but at a company level they can be important. This has been made clear by the decision of Harley Davidson, for example, to move some of its production from the USA to Europe to get around some of the tariff implications.

On the other hand, oil prices have risen for a multitude of reasons. These include US pressures on Iran, supply disruption in several countries and continued demand in some of the major economies.

From a market perspective the FTSE® 100 index is broadly flat year-to-date. However, we do see the effects more clearly at a sector level, for example oil related companies are out-performing industrial stocks. Not surprisingly, investors will be looking for value in beaten down parts of the market.

Emerging markets and the decoupling debate

As we move into the second half of the year developed markets have recovered while emerging markets are falling back which raises the question – are the two beginning to decouple?

It’s true that developed equity markets are broadly flat year-to-date, while some of the major emerging markets are under pressure, quite seriously in countries such as China. However, we believe both are responding to similar threats and pressures.

Global economic growth is actually quite strong going into the summer, but investors are concerned about such issues as the protectionist news coming out from America, the rise in the US dollar, US interest rates and global oil prices. All of these put pressures on the weaker emerging economies as do a series of high profile political risks, such as the situations in Italy or Turkey. It comes as no surprise that when investors are cautious they keep money at home, or withdraw it from countries they consider less safe.

UK interest rate rise – will they, won’t they?

The Bank of England has once again signalled there could be an interest rate rise in August. And while we’ve had mixed messages from the Bank of England so far this year, we believe the probability of an August rate rise is high and the impact should be low.

At Aberdeen Standard Investments, our fixed income team continuously monitor these issues. They note that the bond markets are currently pricing in a 65% probability of the Monetary Policy Committee (MPC) raising rates at its August MPC meeting, with three rate hikes priced in over the next three years.

Our government bond funds are currently holding less gilts than US Treasuries and German bunds, but this is a tactical position as we expect incoming economic data or MPC comments to cause an advantageous change in prices for our portfolios.

Looking longer term, we expect the relative lack of investment and poor productivity in the UK economy together with a cautious fiscal policy from the Treasury suggest that the Bank of England’s attempts to raise policy rates should result in a flatter yield curve in the absence of a change in government or dramatic shift in fiscal policy.

The global outlook

At a big picture level, its clear most companies and economies are in much better shape than they were back in 2007, before the last crisis. And at Aberdeen Standard Investments, our economists believe that global growth should be quite solid in 2018 and 2019.  Unless politicians or policy makers make some major errors, then it won’t be until 2020, when the fiscal stimulus falls away, that things become more risky. Meanwhile, we prefer riskier to more defensive assets in our portfolios.

Diversification is a key element of 1825’s approach to investing. The 1825 Portfolios benefit from specialists being involved at every stage of the investment cycle – from setting the strategic asset allocation, to carefully selecting investment funds based on expert research. Both the underlying investments and asset allocation are actively managed to ensure the portfolios meet our clients’ financial planning objectives.

If you have any questions about your investment strategy, your 1825 Financial Planner will be happy to help.

 

The information in this blog should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on our understanding in June 2018.