The Lowdown on Markets to 17th February 2017
World Markets at a Glance
In this week’s issue
- Financial markets continue to rise but a note of caution might be evident
- The “Trump trade” and “Trumponomics” remains the key driver to daily market moves
- Clearly the US economy is recovering but growth remains modest by historical standards
- Kraft Heinz makes an audacious bid for Unilever but then the offer is retracted amicably
- The euro and pound suffer from the pending Greek bailout, politics, and rise in inflation
- “Beware the ides of March” can the eight year bull market march on indefinitely.
“Financial markets continue to rise but perhaps with some caution”
Whilst the financial markets continue to rise, a note of caution is beginning to show up, especially, after some of the recent frenzied trading days that we have seen in the first few weeks of the New Year. Certainly, markets have been incredibly susceptible to the daily noise, particularly, towards those regular comments that have been coming out of the White House.
Indeed, since the US presidential election back in November 2016 many of the stock market indices have hit new highs, heralding the longest winning streak in decades. Of course, the “Trump trade” or “Trumponomics” as it’s being perceived, has seen Wall Street’s four leading indices gain in value whilst continually hitting intra-day, or all-time highs. This statistic has not been seen since the mid 1990’s, and leading up to the tech bubble crash.
What is intriguing about this latest rise in the markets is that whilst US president Trump has talked the talk, we are yet to see whether he and his administration can walk the walk, given that investors are still awaiting the constructive details for many of his proposals. Clearly, underpinning this rally is the increasing confidence from investors that the US economy, and corporate earnings outlook, is going to look more positive going forward, and that the current level in the market can be justified.
“The US economy is on a path of recovery”
Certainly, there is a noticeable difference in the US economy than say a year ago, when fears were mounting that we might be heading for a global economic recession. Indeed, on the 11th February 2016 the Dow Jones Industrial Average Index touched a low of 15,660.18, after experiencing a sell-off at the back end of December 2015. However, since then the US economic data has turned more positive, which in turn, has seen the index rally by just over 30 per cent. A similar trend line can also be plotted for the S&P 500 Index. Admittedly, around 12 per cent of this rise has come about since the US presidential election.
Clearly, the US economy is on a path of recovery, but growth does remain modest by historical standards, given that it has been a difficult, and unpredictable period, since the financial crisis back in 2008.Indeed, the successful actions taken by the US Federal Reserve Bank, over the past eight years, of introducing quantitative easing, and reducing interest rates to historical lows, would now seem to be at an end, with future expectations focused more upon fiscal tightening, higher inflation, and rising bond yields.
Never-the-less US equity prices continue to march upwards subscribing to the reflationary promises given by the new administration, and a projected economic growth rate of 4.0 per cent. This would seem rather audacious given the current level of annualized growth, but president Trumps proposed combination of tax cuts, infrastructure spending and deregulation is also rather audacious. Therefore, we will need to wait to see whether he can deliver on those promises whilst Fed Chair, Janet Yellen, try’s to steer the economy carefully from a monetary and fiscal perspective. In fact, only last week she said that it might be “unwise” for the central bank to wait too long before raising interest rates again which might mean that a March increase could be on the cards.
“We have also seen some mega proposed UK takeover bids by foreign predators”
In the UK worries over Brexit seem to have moderated for the time being, however, it’s now been a year since former Prime Minister David Cameron announced that Britain would vote on whether we would remain in the European Union, or not, and of course, on the 23rd June 2016 the vote went in favour of leaving the EU. This in itself has created a wave of uncertainty with the pound collapsing against a basket of leading currencies whilst the FTSE 100 Index has rallied to a new all-time high.
In addition to the volatility seen in the pound, and the UK stock market, since June 2016, we have also seen some mega proposed UK takeover bids by foreign predators. Clearly, since the vote, and sterling’s fall in value, it has meant that many of our top quality and leading British companies have become vulnerable to bids and quick fire sales. Indeed, we have already seen Arm Holdings fall prey to Japan’s Softbank, whilst Rupert Murdoch’s Fox has taken its opportunity to bid for the 39 per cent of the satellite broadcaster Sky that it does not already own.
And of course last week we saw US giant Kraft Heinz make a daring bid for Unilever which sent the shares of the Anglo-Dutch company sky rocketing up. But of course, it was then no surprise that the board immediately rejected the US$143.0 billion takeover. This then led to the US conglomerate, backed by three Brazilian billionaires and legendary investor Warren Buffett, deciding to walk away from the deal announcing that both companies had reached an “amicable” decision.
As a result, it would now seem that Kraft Heinz were intent to make a friendly bid for the company but it was clear that Unilever did not wish to be pursued, hence, the US business politely stepped away. But of course, we might see more hostile bids appear for many of our other British businesses over time, especially, if the pound were to weaken further once Article 50 is invoked.
Understandably, whilst M&A activity of this size helps to generate returns for shareholders and the stock market, the ramifications for UK jobs, and factories, can been quite devastating given that in some cases the costs that can be stripped out of companies of this size are meaningful . Indeed, if you look at a business such as Unilever it employs something like 168,000 people whilst Kraft Heinz employs around 42,000.
And now moving onto the markets for last week, whilst global equities remained a popular choice by investors, supported by some better-than-expected US economic data, the Federal Reserve Bank’s comments on future interest rate hikes may have dampened down some of the bullish sentiment. But in respect to the regional performances, the developing markets are still clearly out-performing those of the developed over the first seven weeks of the New Year.
“M&A activity of this size helps to generate returns for shareholders and the stock market”
In the bond markets we did experience some weakness in the first half of the week, perhaps because investors are beginning to position themselves for a period of higher yields caused by rising inflation and tighter US fiscal policy. Also there are still questions being asked about Trump economic reforms and how they will pan out over time.
And in the foreign exchange markets the euro deteriorated as negative sentiment towards the eurozone gained further momentum. The likelihood of a swift outcome to the forthcoming Greek bailout dilemma and nervousness over the French election is creating some nervousness amongst European investors. Also the pound seemed to come under some renewed pressure on the back of some disappointing UK sales numbers and the squeeze on UK households as inflation continues to rise.
Finally, we are just a couple of weeks away from celebrating the eighth anniversary of this current bull market, and whilst there is still a strong possibility that these markets can rally further, there is not much wriggle room for either political or central bank mistakes , let alone a political surprise or two in the forthcoming European elections. Clearly, there are some nervous bulls around, which in turn, could easily become unnerved by an unforeseen event. Therefore global investors must remain wary and be prepared to alter course if need be.
Peter Lowman Chief Investment Officer
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 .