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Monthly Market Commentary August 2018

Jon Cunliffe, Charles Stanley Chief Investment Officer, with his monthly market commentary.

by
Jon Cunliffe

in Fiduciary news

20.08.2018

July was a positive month for global stocks, with the MSCI AC World index gaining 3.4% in Sterling terms. The backdrop of another solid corporate earnings season and solid economic growth, particularly in the US, more than offset ongoing concerns about escalating and unresolved trade tensions. Eurozone and US equities led the way, with the Eurostoxx and S&P500 returning 4.6% and 4.1% respectively in GBP, with Asia and EM once again underperforming due to the narrative around trade. Elsewhere, and despite the fact that the foreign exchange markets (correctly) anticipated August’s UK base rate hike to 0.75%, Sterling remained on the weak side, falling 0.5% in trade weighted terms, reaching its lowest level since November 2017. Much of this due to broad based US Dollar strength, but fears of a so called “hard Brexit” have weighed on sentiment in recent weeks.

What is interesting is that despite Sterling weakness in recent months, large cap UK equities with a high proportion of foreign currency earnings have not outperformed their small cap domestic counterparts – the FTSE100 and the FTSE All Share Indices have posted similar returns in 2018. Whilst domestic UK activity has been soft, the second quarter did see a notable improvement and the weakness in commodity markets on fears around the trade cycle has put pressure on the energy and materials sectors, which combined comprise 20% of the FTSE100.

As we look towards the autumn we continue to expect financial markets to be skittish. Trade issues remain unresolved and although a medium intensity trade war is discounted by financial markets the US and China have yet to engage in serious talks to resolve the dispute and there remains the ongoing risk that the European auto sector will attract President Trump’s attention. So whilst our base case remains that Trump will work towards a comprehensive trade deal ahead of the mid-term elections in the US in November, it is somewhat early to expect a (market positive) resolution.

Elsewhere, ongoing turbulence in Turkish financial markets and a sharp Turkish Lira depreciation highlight the risks to borrowers with weak fundamentals of rising US Dollar interest rates and a strong Dollar. More broadly the strength of the US Dollar this year has led to Emerging Market currency and bond weakness which have prompted a number of central banks to tighten policy to discourage capital flight. In the short term this has been negative for domestic equity markets, adding to the pressure from the ongoing trade dispute. Looking ahead, our sense is that the valuation discount which EM assets are beginning to attract, Trump’s desire to strike a trade deal and a more synchronised global growth dynamic as we head through the rest of the year should ultimately prove positive for the less vulnerable EM economies and their markets, notwithstanding ongoing volatility in the weeks ahead.

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