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Market View

A monthly market outlook from Sanlam Private Wealth

A PDF version of Market View is available.

Beware of market neurosis, as challenging times lie ahead


When UK inflation figures were released on 21 March, and they had surged to their highest level in three years, commentators were quick to talk of an interest rate hike. Mark Carney, governor of the Bank of England, was forced to remind people not to overreact to a single data point, and instead be mindful of the bigger picture. As investors, it pays to heed this advice.
 
Markets can develop a neurosis when any part of the market is under stress, and that’s true for some of the challenges we’re currently facing. Interest rates are on the rise in the US, as is global inflation. Trump is coming under increasing pressure for what he will, and will not, be able to get through Congress, while the UK has begun negotiations to leave the European Union. Never has it been so important for investors to look beyond short-term volatility as we navigate significant change to the economic landscape.
 

Trump in the spotlight

With four months of optimism built into equity prices, markets have quickly become fixated on Trump’s policies and whether he can implement his fiscal and tax-cut promises. His failure to pass the healthcare reform bill in Congress was not a good start, and led to the worst day of trading since he was elected. So what lies ahead? For financial markets, the healthcare bill is only useful in that it gives an indication of Trump’s political support and how the implementation of other policies might play out. The market really wants corporate tax rates to be cut, as this will feed straight through to equity earnings and will go a long way in justifying current share prices. Until we have a clearer view on whether or not this will happen, we can expect nervousness in the market.
 

Brexit negotiations

As we begin a two-year-long negotiation, it’s difficult to see who the eventual winners and losers will be in the complex process of Brexit. In the short term, UK companies that export their goods and services are in the sweet spot, as they benefit from the weakness in sterling (making their products more globally competitive), while still operating under the existing attractive trade rules. We expect them to grow their profits, but uncertainty for their long-term prospects may cap their share-price gains. The real question is whether or not the uncertainty hanging over the UK throughout the negotiations will deter investment by companies, both local and foreign. We know there are challenges ahead, but we are cautiously optimistic, especially given that valuations are much cheaper than many other regions in the world.
 

Outlook

So far, markets have held firm, but we do need to be prepared for a potentially turbulent time ahead. Of course, volatility can result in opportunity, and we’re well positioned to take advantage of any short-term opportunities that may arise.

“As custodians of our clients’ money, we look beyond the short-term conjecture and news agenda. Despite our expectation that over the coming months investors should be prepared for a degree of volatility, our primary focus will continue to be the underlying numbers and longer-term outlook.”

Philip Smeaton, Chief Investment Officer
 

The price of oil

While short-term worries of oversupply still abound, it may come as a surprise to hear that oil could be presenting a longer-term opportunity. Although above-ground stocks are in plentiful supply, and the nimble US shale producers have returned to the market (keeping prices low), there are signs that the supply-and-demand balance may be recalibrating:
  • When oil prices fell between 2014 and 2016, large-scale exploratory projects that are necessary for future production were also cut. As a result, there is a dearth of projects bringing oil to market, which could mean a shortage of supply in two to three years’ time – probably enough to negate the supply growth we are seeing in US shale.
  • Speculators that have been hoarding oil and waiting for prices to increase are now starting to bring that oil to market. This is pressuring prices in the short term but brightening the future picture.
  • Demand for oil is not a problem, and continues to grow at approximately 1% per year. This is largely driven by record global car sales, as well as economic growth in Asia.
  • The chart below shows how companies have cut their investment in new projects, and forecasts an upswing in capital expenditure as oil companies are forced to invest in future exploration and oil production to meet demand. The reduction in capital expenditure since 2012 supports the notion that there may be a shortage in supply in the not-too-distant future.
graph1.png
 

Can the euro and sterling make a comeback against the US dollar?

Our clients have benefitted from our global exposure, giving them access to the US dollar, which has had a good year in the global currency markets.

Economic indicators in the UK, such as strong retail sales, low unemployment and decent economic growth data, would normally support a stronger pound. But accommodative monetary policy and the cloud of uncertainty created by the EU negotiations will continue to hang over the currency, now compounded by a potential Scottish referendum. A similar conundrum faces Europe. There are some green economic shoots, but central-bank policy is likely to keep yields low at this stage.

We’re nervous that the US dollar looks expensive, and ultimately we expect the imbalance to be corrected. But that’s unlikely to happen any time soon.
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A PDF version of the Market View is available.

This article is for information purposes and should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by Sanlam Private Wealth. Any expressions of opinion are subject to change without notice. Reproduction of this commentary is not allowed in whole or in part without prior written agreement from ‘Sanlam Private Wealth. Past performance is not a reliable indicator of future results. Investing involves risk. The value of investments, and the income from them, may fall as well as rise.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.