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Market View

The divergence between sentiment and reality giving cause for concern

A PDF version of Market View is available.

In March we talked about optimism, and the fact that it can become a self-fulfilling prophecy for growth. But what happens if reality doesn’t catch up with this positive sentiment? At what point do markets stop believing, and react to the fact that this confidence was, in fact, misplaced?

It’s this scenario that is continuing to give us cause for concern. At the beginning of 2017, investors were buoyed by the prospect of tax cuts in the US, and what that would mean for the global economy. Yet nearly half way through the year, we’re seeing an increasing divergence between the positivity of the “softer” forward-looking economic indicators (such as consumer purchasing, manufacturing and small business sentiment indices), and the more concrete backward-looking data (such as payrolls, vehicle sales and corporate loans), which are showing signs of weakness.

Here is our view on what we think this means for global markets, and how it’s affecting our investment thinking.

Despite generally improving global economic data, our view remains that we are in a low return environment, as current valuations already discount a benign interest rate environment and significantly higher company earnings.” - Philip Smeaton, UK Chief Investment Officer

 

The US – awaiting clarity on tax cut

To achieve the highly anticipated economic expansion in the US, the Trump administration needs to turn the promise of tax and government infrastructure reform into reality. If it can do this, it will deliver immediate results for company bottom lines, helping to justify current stock prices. But if the tax cuts are not realised, there could be dramatic falls. We have limited our US exposure for now, and we expect there to be further clarity on these changes in August.

The UK – disappointing economic performance and a general election

The UK’s economic performance has been disappointing, given that the weakness of sterling should have supported export-oriented manufacturers and those that compete with imports. Despite low interest rates, businesses continue to be reluctant to invest in growth (which is understandable, given Brexit uncertainty), and the government is holding back on infrastructure spending. An impending election may provide a boost to sterling and sterling-denominated assets, perhaps providing an opportunity to reduce our exposure to the region.

Europe: improving fundamentals, but concern over viability of the euro

Improvements in company earnings and the outlook for inflation are positive indicators for Europe. There remains concern for the future viability of the euro, but this is mostly counter-balanced by the relatively attractive valuations and improving fundamentals in the region.

Emerging markets – stabilisation and attractive valuations

Valuations in the emerging markets appear cheap enough to compensate for the additional risk. Stabilisation within commodity prices, less uncertainty surrounding China and improvements in the political outlook for other major emerging market economies, such as Brazil and India, also make us more comfortable with this risk. Ultimately there are some excellent companies in these regions, experiencing better growth and trading at more attractive prices than their developed-market peers. As a result, we are looking to allocate some capital to this region.

The significance (or not) of weakening car sales in the US

We’ve recently seen a dramatic decrease in car sales in the US, which fell to their lowest level in two years. Traditionally, car sales are seen as an early indicator of changes in economic health, so how significant is this? As yet, it’s too early to tell, and we shouldn’t read too much into a single data point. It is a worrying shift in consumer behaviour, but one that will need to play out over the longer term to tell us anything meaningful. Watch this space.


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Five reasons why we should be concerned about stagflation in the UK

A recent report by the Office for National Statistics (ONS) showed that UK manufacturing production fell by 0.1% in February versus an expected increase of 0.2%. Meanwhile, inflation is on the increase, giving rise to the term ‘stagflation’. Here are five reasons why we should be concerned:

  1. Despite Brexit worries, we would expect manufacturing to be stronger. This is because many UK manufacturers are competing against more expensive imports, or are exporters themselves – in both cases benefiting from the weakness of sterling.

  2. UK companies are still operating under the existing EU rules, so are currently in the sweet spot of trade rules. They should be able to perform better in these conditions.

  3. The Government is in the middle of a deficit-reducing agenda, which means it is not going to be a major source of growth spending. Growth must come from the private sector.

  4. UK inflation is higher on the basis of higher global prices and a weak currency – not economic growth. So the economy is going nowhere.

  5. Wages are not increasing in line with inflation, and there is weaker consumer confidence. 

 A PDF version of 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.