The Lowdown on Markets to 29th April 2016
World Markets at a Glance
In this week’s issue
- Global equity markets suffer from corporate earnings frustrations and economic data.
- Whilst US corporate earnings numbers are mixed the technology sector disappoints.
- The latest US economic data dents investor confidence and leads to a broad sell-off.
- The Bank of Japan chooses not to add to QE or introduce any new stimulus packages.
- In the FX market the yen surges to an 18-month high after no further BOJ intervention.
- As we enter the month of May global investor confidence could be tested.
“Stock markets slid on disappointing corporate earnings and economic data”
Global equity markets were rather lacklustre last week fuelled by some disappointing US corporate earnings numbers, weaker than expected economic data, and what was perceived by many market professionals as insufficient monetary action taken by the Bank of Japan, given that since 2013their primary aim has been to reflate their economy.
Clearly, US corporate earnings numbers for the first quarter of 2016 have been rather mixed with technology stocks suffering the most. Regrettably, this particular sector is very important, given that it represents about one fifth of the stocks in the S&P 500 Index. Indeed, in the broader market some sectors such as energy and telecommunications fared much better with double-digit gains for 2016.
“There have been some signs that perhaps global investors have been switching out of tech stocks”
Some of the big heavy weights in the tech sector such as Apple, Microsoft, Alphabet, Googles parent company, and Twitter were the culprits of frustration for the markets and their shareholders, whilst the likes of Facebook and Amazon delivered acceptable earnings numbers. Equally, there have been some signs that perhaps global investors have been switching out of tech stocks in favour of energy and financial stocks that have been pummelled over recent years and are showing signs of recovery.
Admittedly in the past, when we have experienced these technology shakeouts, it has been right to accumulate some of those businesses that still have excellent growth potential. In a world were tech and innovation go hand in hand there are always exciting new areas to explore, for instance, there is cyber security which has become incredibly important, and has the potential for some companies to deliver very rapid growth sales.
“We have now seen 62 per cent of S&P 500 companies report their Q1 earnings for 2016, with 74 per cent of those businesses reporting earnings above their mean estimate”
In respect of the current earnings scorecard, we have now seen 62 per cent of S&P 500 companies report their Q1 earnings for 2016, with 74 per cent of those businesses reporting earnings above their mean estimate, and 55 per cent reporting sales above their mean estimate. However, perhaps the more important statistic so far is that 36 of those companies have issued negative earnings per share guidance for Q2 2016, whilst 18 have issued positive EPS guidance.
Moving onto US economic data, global investor confidence was dented by a cluster of disappointing financial figures, manufacturing and construction data showed slow but steady growth, whilst the US consumer seems to have spent less that Wall Street was expecting. Understandably, it was expected that with energy prices collapsing then the consumer would spend more, however, it would appear that this has not been the case; in fact, they seem to have either saved their money or repaid debts.
Whilst the economic data and corporate earnings figures were important features of last week, it was the failure of the Bank of Japan to introduce any new stimulus to try and help the deteriorating Japanese economy. Indeed, the principal monetary aim of the BoJ since 2013 has been to support Abenomics through quantitative, and qualitative easing, specifically getting Japanese inflation to 2 per cent whilst weakening off the yen against a basket of leading currencies.
“The yen has now actually begun to strengthen, whilst inflation has remained stubbornly low”
Unquestionably, the central bank has managed to weaken off the yen over that period of time but have failed to meet the government’s inflationary expectations. Inevitability, this has led to the BoJ’s recent strategy of introducing “negative interest rate protocol”, however, the market’s reaction to that strategy has been surprising, given that the yen has now actually begun to strengthen, whilst inflation has remained stubbornly low. Consequently, the failure of this policy ought to have led to the BoJ taking further action last week but clearly that has not been the case.
Undoubtedly, the leading central banks still remain very accommodative, trying to coax the financial markets higher, whilst looking to kick start a flagging global economy. Unfortunately, their strategies now seem to be losing some momentum, and the confidence of global investors, and therefore, we must become more mindful of what the next chapter might hold for the markets and its investors.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed.
Investment Quorum is authorised and regulated by the Financial Conduct Authority .