Market Review and Outlook
Review of August 2017
The MSCI World index of developed stock markets rose 0.14% in August in US dollars, and 0.15% in local currency terms, making it the tenth consecutive month of positive returns.
Market volatility was up from the very low level seen at the end of July. This was triggered by a spat of baiting between North Korea’s President Kim Jong-un and President Trump, and aggravated by thin market trading volume due to the holiday season. But of the major markets only the U.K and Hong Kong recorded monthly changes of over 1%.
Core government bond markets were similarly calm. Perhaps of greater note were events in commodity and foreign exchange markets.
The continuing rally in the copper price, to multi-year highs, contributed to optimism over future global GDP growth. In the past, the copper price has been found to be a good lead indicator of global manufacturing output.
Sure enough, at the end of August U.S second quarter GDP showed stronger than expected growth, at 3.0% annualised, and China released stronger than expected industrial production numbers. China had in July reported 7% second quarter GDP annualised growth rate, also much stronger than had been anticipated.
On currency markets the euro continued to rally, briefly peaking at $1.20 at the end of the month. The euro is benefiting from economic recovery in the euro zone, from speculation that Mario Draghi is looking to reduce the ECB’s EUR 60 billion a month bond purchasing program, and from continuing weakness in the U.S dollar.
In a sign of increasing long-term confidence in the currency, global investors have been reducing the extent to which they hedge their currency exposure when holding euro zone equities and bonds. The euro is becoming an asset in its own right.
Of the major stock markets, the MSCI U.S index was up 0.25% in local terms with tech stocks once again dominating the market, led in part by excitement generated by Apple’s announcement of a forthcoming iPhone 7 smartphone.
The MSCI Europe ex UK index was dragged down by a small fall on the German stock market. Analysts continue to fret over the impact on the German auto sector of investigations into cartel allegations, and concerns that the industry is too complacent over the long-term technology challenges coming from the U.S tech industry in the form of driverless and battery-run cars.
The MSCI U.K index rose 1.52% in sterling terms over August, and fell 0.77% in dollar terms. Individual stock stories dominated the news towards the end of the month, with significant negative news flow coming from market stalwarts such WPP, Provident Financial (down 70% at one stage) and Dixons Carphone.
MSCI Japan fell 0.45% in yen, and was down 0.05% in dollars.
The MSCI Emerging Market (EM) index rose 2.23% in dollars, and 2.11% in local currency terms. Brazil and Russia made strong gains thanks to optimism over commodity prices, and China performed well in response to strong economic data and continued anticipation that Chinese shares will in time constitute a larger portion of the within the MSCI Emerging Market index.
The MSCI (South) Korea index fell 1.74% in local terms. This was, perhaps, a surprisingly small fall for a country whose capital Seoul is within easy striking range of North Korea’s substantial conventional artillery force.
It is difficult to see how North Korea’s aspiration to be a nuclear power can be thwarted by the United States and its allies. There is no military solution that does not risk the deaths of potentially millions of Koreans on both sides of the border. In all likelihood, the U.S will simply have to accept that North Korea has nuclear missiles, in the same way Russia and the U.S had to accept China’s development of them in the 1950s.
If so, threats and insults may well persist between Kim Jong-un and Donald Trump, but with little lasting impact on financial markets. However, there is a risk of miscalculation from either side with potentially devastating consequences for the region and for global financial markets.
More generally, global GDP growth may exceed current estimates of 3.5% this year, supporting corporate earnings growth and stock market valuations. The biggest risk to equities comes from more hawkish central bank policy, as they respond to inflation pressures. But inflation is not yet a problem, and this should delay any significant tightening of monetary conditions.
Indeed, in the U.S, CPI inflation is stable at 1.7% y/y, while weak jobs and weekly pay growth data in August suggests little pressure on prices coming from the labour market. A further interest rate hike by the Fed is priced in to the market, but longer-term interest rate forecasts look likely to be reduced further if the current weak labour market data persists.
In the euro zone a strong euro is a deflationary force, partly countering the impact on the region’s economy of the ECB’s asset purchase program.
Therefore global stock markets may continue to make steady gains over the coming months, supported by on-going loose monetary policy from central banks and corporate earnings growth.
The content of this publication 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. It does not provide personal advice based on an assessment of your own circumstances. Any views expressed 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. Any expressions of opinion are subject to change without notice. deVere United Kingdom is authorised & regulated by the Financial Conduct Authority.