The Multi-Asset Process

June 2018 market review

Despite the distractions of World Cup and warm weather, trade war fears continued to dominate sentiment in June, with a side-order of child cruelty adding to the constant maelstrom of controversy surrounding President Trump.

Turning its ire towards Europe, the US imposed tariffs from the start of the month, refusing to extend the EU’s exemption from 25% duties on imports of steel and 10% on aluminium. In response, the EU introduced matching duties on a range of US products, including steel and aluminium, farm produce such as sweetcorn and peanuts, bourbon, jeans and motorbikes. Politicians appear have carefully selected products to do as much economic and political damage as possible, with whiskey targeted because it is produced in Kentucky, the state of Senate majority leader Mitch McConnell.

Meanwhile, tariffs on Chinese goods are due to take effect from early July, which could cut as much as half a percentage point from the nation’s economic growth, according to economists. The warning comes amid signs that the world’s second-largest economy and biggest contributor to global growth is already slowing down: China’s economy grew by 6.9% in 2017 and the government has set a growth target of 6.5% for the current year.

China has already been suffering in stock market terms, with the Shanghai Shenzhen CSI 300 Index down 7% on the month and more than 20% on 2018, officially putting the region into bear market territory.

Fears are growing that this escalation of protectionist measures could spark a fresh downturn just as the global economy is picking itself up. The Bank for International Settlements (BIS) said there are already signs that the ratcheting up of rhetoric is weighing on investment, while a group of US economists said Trump’s trade policies could drag the country into recession by 2020. At this stage, companies appear not to have received the memo however: US earnings growth in the second quarter is predicted to reach close to 19%, the highest in more than seven years.

For my part, the obvious concern is that worsening trade conditions put pressure on inflation, particularly with so many companies dependent on global supply chains. If products become more expensive, companies can obviously lose market share and so I remain convinced that, for all the posturing, politicians will stop short of policies that could seriously damage economic growth.

Elsewhere, June was also another busy month on the interest rate front, with major announcements from the US Federal Reserve and European Central Bank. Taking the Fed first, as widely expected, the Bank increased rates during the month, citing an economy growing at a solid rate and improved household spending. More surprising was the release of an updated ‘dot plot’ chart showing forecasts from each Fed member, which suggests we could see another two hikes this year and three in 2019. Of course, all future Fed activity is predicated on economic data releases but that would take the Fed Target rate to between 3.5 and 3.75%, which is definitely back to ‘old normal’ range.

The ECB meanwhile took the unprecedented step of announcing interest rates should stay at current levels at least until summer 2019 and as long as necessary to ensure the “evolution of inflation remains aligned with the current expectations of a sustained adjustment path".

At the same time, the Bank also outlined long-awaited plans to taper quantitative easing, albeit not until September. At that point, the current €30bn of monthly asset purchases will reduce to €15bn before stopping in December.

June 23 also marked the second anniversary of the Brexit vote and the month included the customary back and forth: Theresa May survived another challenge after a revolt by pro-European Conservatives fizzled out in the Commons but later in the month, thousands took to the streets of London to demand a second referendum.

In the portfolios, we have taken the opportunity to top up emerging market exposure over the month as well as trimming back positions in expensive developed markets such as the US and UK large caps. EMs have been left behind as other regions recovered from recent weakness and we took the chance to move towards our target weightings while valuations are depressed.


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Thursday, July 5, 2018, 3:50 PM