Market Bulletin – Market Reset – Monday 29th October 2018

A turbulent week in global markets saw investors offload technology and growth stocks, and the FTSE 100 hit a seven-month closing low.

This week, over 380 years ago, Sir Christopher Wren – the architect behind the Royal Observatory in Greenwich – was born, leading to the reversion to Greenwich Mean Time on Saturday night. This met with the usual reminder of ‘spring forward, fall back’. As we saw the clocks go back, we also saw a drop in the financial markets that handed back the gains that had been obtained during the early part of the year.

In the UK, London’s FTSE 100 marginally held up against challenging conditions last week, but still closed the week down more than 2% to hit a seven-month closing low. As a result, the UK market is now at 12% below its peak that we saw at the end of May this year; certain stocks were also badly affected, with marketing giant WPP falling over 10% and financial companies weighing heavily on the index, following the release of the quarterly results.

Across the Atlantic in the US, the S&P 500 dipped to its lowest point in a year on Wednesday; at the same time the technology-heavy Nasdaq dropped more than 4.4% resulting in it suffering its single worst day of trading in seven years. On Thursday they began to fight back; however, this was short-lived as Friday brought more big losses as a disappointing earnings season and fears of long-term growth took hold, despite the better-than-expected economic growth of 3.5% in the third quarter.

“It is no great surprise to us that this month’s sell-off has been largely driven by the dumping of growth stocks on very elevated valuations,” commented Majedie, manager of the St. James’s Place UK Growth fund.

Amazon and Alphabet, parent company of Google, lost $100 billion in market value between them on Thursday, after they announced results of missed optimistic targets. This came about despite Amazon making a record quarterly profit of $2.9 billion, and revenues rising to $56.6 billion, compared to $43.7 billion in the same period during 2017. When we look closer at the technology market, we can see that some companies, such as Twitter, Tesla and Microsoft are receiving a much more positive response and posting impressive earnings.

Many of the equity markets that have reached historic highs earlier this year are now in ‘correction’ territory, which is around 10-15% off their previous peaks. The issues that have caused the current market uncertainties are nothing new – corporate earnings, rising interest rates, and international politics over issues such as trade tariffs, Brexit and the uncertainties surrounding Italy. Although they may appear unsettling for some, the recent downturn needs to be put into perspective – the FTSE 100 has risen 171%, the S&P 500 is up over 364% and the MSCI World has returned 259%, in sterling over the last decade.

Is there Sino-US unity?

As you may know, the Prime Meridian at Greenwich doesn’t just dictate our time zone, but it is also the medium that divides the world into the Eastern and Western hemispheres. However, our neighbours in the east do not partake in the biannual hour shift – China hasn’t altered their clocks since 1991, whereas Japan hasn’t since 1951.

This isn’t the only division between US and China that has been brought into focus recently. The introduction of tariffs and signs of a heightening trade war have impacted the wider Asian economy – Shanghai’s CSI 300 Index reflecting the volatility in the US. Meanwhile, Japan’s TOPIX touched its lowest point for 12 months last week and the Nikkei fell to its lowest point since March.

The CSI 300 in Shanghai started the week with the biggest surge it’s seen in three years – this is due to the strong promises of support for the economy from President Xi Jinping; this, however, turned in the other direction as it dropped back as the stormy midweek trading activity took hold. Despite this, the index still closed with weekly gains of 1.2%.

Nerves are becoming more prominent for investors as China’s growth slows – companies within the country are reporting increased costs due to expanding labour shortages and tariffs. Manufacturing giants, such as Caterpillar, take some responsibility for the falling US market, as they are blaming currency headwinds for its poor results and have stated that a strong dollar poses a challenge to manufacturing exports to more developing markets. Sentiment has been tested in October, with global stocks suffering their worst month in more than six years.

Going for gold?

With the price of gold jumping more than 3% this month, it has provided long-term investors with the opportunities they require to counteract further uncertainties.

“Following the recent pull-back in markets, we have started to increase our equity allocations,” commented Johanna Kyrklund of Schroders, manager of the St. James’s Place Managed Growth fund. “The move is tactical; we are in the mature phases of the equity bull market, but we believe we have a window of opportunity.”

After a decade where growth strategies have outperformed, we are starting to see increasing signs of a return to focus on company fundamentals. “When a regime change from growth to value occurs, the moves are sudden and violent, and hence investors need to position themselves ahead of the event,” commented Nick Purves of RWC Partners, manager of the St. James’s Place Equity Income fund. Such shifts also emphasise the importance of a portfolio strategy that blends different investment styles.

UK equities are more out of favour, and more undervalued compared to the rest of the world, than at any other point this century. They may remain this way while Brexit uncertainty persists, but with the FTSE 100 yielding 4.62%, investors are currently being paid relatively well for their patience. “This strikes us as one of the biggest investment opportunities for years,” added Purves.

Whatever happens in markets over the next three to six months, you mustn’t lose the focus on the long-term objectives and remember that achieving those objectives requires some risk to be taken.

Italian uncertainty

For the first time in history, the ECB rejected Italy’s budget proposal, further raising the uncertainties surrounding the nation. Rome is sticking to its plan to run a deficit of 2.4% of GDP next year, therefore breaching the EU’s budget rules, and the European Commission gave Italy three weeks to rewrite its budget. This news followed a downgrade from Moody’s last week which put Italy’s sovereign debt one rating above junk. However, Prime Minister Giuseppe Conte is adamant that the challenges his country faces and its position at loggerheads with EU financial leaders will not lead to ‘Italexit’.

The challenges and the wider Brexit uncertainty are contributing to revised growth projections in the eurozone, with Mario Draghi, the President of the European Central Bank, announcing that the euro area economy is projected to grow at a slightly slower pace this year and next. GDP growth expectations this year have been revised down to 2.0% from 2.2%, and next year from 1.9% to 1.8%.

Survival to revival?

Despite lurid headlines the previous weekend, with unnamed MPs baying for blood, Theresa May soldiered on as prime minister following testing encounters with her Cabinet and the backbench 1922 Committee. One MP suggested the atmosphere was not a “lions’ den, it was a petting zoo” and her speech was met with the traditional, congratulatory banging of the table.

Although it received a positive response, May will be hoping her chancellor, Philip Hammond, is able to throw some ‘red meat’ to backbenchers in today’s Budget, having received welcome news that public spending cuts and tax receipts have combined to provide a £13 billion windfall. Both May and Hammond have suggested that this Budget is the beginning of the end of austerity, with the NHS earmarked for an increase in spending.

Majedie, RWC Partners and Schroders are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley.

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