Tom Elliott’s Market Review and Outlook – April 2017

17 May
May 17, 2017

Market Review and Outlook

Review of April 2017


The MSCI World index of developed stock markets rose 1.5% in April in US dollars, and 1.2% in local currency terms.

Returns were led, again, by continental European stock markets that reflected a reduction in political risk following the centre-right Emmanuel Macron’s win in first round of the French presidential election. Regional economic data remains strong: the European Commission’s April economic sentiment index rose to 109.6 in March, its highest since September 2007. ECB head Mario Draghi assured investors that monetary policy will not tighten in the foreseeable future.

First quarter corporate earnings from the pan-Europe Stoxx 600 index showed a rise of 12% over the first quarter 2016. The MSCI Europe ex UK index rose 4.1% in USD, and 3.5% in local currency.

Prime Minister Theresa May announced a surprise general election for 8th June, which supported sterling as analysts expect a strong Conservative majority to be returned to Parliament, which should make it easier for the government to negotiate a soft Brexit.

Preliminary estimates of first quarter GDP suggest growth of just 0.3% over the previous quarter, down from 0.7% in the previous quarter. Rising inflation appears to be hurting demand growth.

The sterling share prices of large foreign-currency earning stocks fell as the pound rose, with the energy and mining sectors in addition hit by weaker energy and metal prices. The MSCI U.K index rose 2.1% in USD, but fell 1.3% in sterling terms.

U.S economic data included weaker than expected jobs growth an inflation in March. Trump declared that China was not manipulating its currency, other policy U-turns included warmer words for Janet Yellen, head of the Fed. Her measured approach to interest rate hikes now appeals to Trump, as he attempts to manipulate the dollar down and so boost U.S exports.

The first quarter earnings season has so far been positive, helping to support stretched Wall Street valuations. Led by energy, financials and tech, S&P500 earnings look set to rise 11% over the same period last year, the fastest growth since mid-2011. The MSCI U.S index rose 1.0%.

The Tokyo market remains dogged by a political scandal involving Prime Minister Abe, huge losses at Toshiba, nervousness over first quarter earnings and heightened tension over North Korea. A late April recovery enabled the MSCI Japan index to rise 1.0% in USD, 1.1% in yen terms, over the month.

The MSCI Emerging Market index rose 2.2% in USD and 2.3% in local currency terms. Emerging Europe led the way, thanks to strong performances from Greece, Turkey and Poland.



As we move into the summer, we can expect three main themes to continue to dominate sentiment on global capital markets and perhaps give rise to volatility.

Investors should remain invested should volatility increase. Time after time we see rapid corrections follow stock market sell-offs, making it expensive for investors to return to the market.

Moreover, given the strong global corporate earnings growth at present, and an assumption that global inflation and interest rate expectations remain steady, current valuations appear sustainable.

The first issue is will Trump succeed in passing significant policies involving infrastructure spending and tax reform through Congress? If so, will the effect be an over-stimulus of the economy and another rally in the dollar, or will it be an appropriate one given somewhat weaker recent economic data, and the current

What if fiscal conservatives in Congress insists on ‘fiscally neutral’ policies that do not add to government borrowing? We may see a U.S and global stock market sell-off as investors realise there will be no ‘Trump reflation’ to help boost corporate earnings. Treasuries will rally as inflation expectations are reduced.

Second, can the Europe ex UK stock market rally persist? Probably. The probable win of Macron in the second round of the French presidential election will calm worries over the rise of the far-right, and he may be able to put in place the economic reforms France needs.

A large Conservative majority in the forthcoming general election will help May manage her party, as concessions are made to the U.K negotiating position. However, sterling may well rise further as a soft Brexit emerges, further hurting large FTSE 100 foreign currency earning companies.

Third, China’s 6.9% first quarter GDP growth (year-on-year) is unsustainable, powered as it was by credit to the private sector. Fresh credit controls are likely to lead to weaker growth, which could trigger devaluation and an increase in capital flight. A repeat of the global stock market bumps of July 2015 and early 2016 may be on the cards.

Tom Elliott’s Market Review and Outlook – March 2017

10 Apr
April 10, 2017

Market Review and Outlook

Review of March 2017



The MSCI World index of developed stock markets rose 1.1% in March, in US dollars, and 1.0% in local currency terms, thanks to some over-sized returns from euro zone stock markets. The monthly returns contributed to strong overall first quarter returns of 6.4% in USD, and 5.4% in local currency, for global stocks.

The key theme in March was investor nervousness over the outlook for the so called ‘Trump trade’, after Congress failed to back President Trump’s proposals for reforming Obamacare.

On the 20th March a global sell-off took place as analysts began to price in the risk that Trump will meet with similar intransigence from Congress over his tax reform policies, his plans for infrastructure spending and his ambitions to de-regulate business.

In addition, U.S economic data began to become ambiguous after a run of strong reports. February’s ‘flash’ harmonised index of consumer prices was up 1.5% year-on-year, compared to 2% the month before, and while consumer confidence is strong, business confidence surveys have started to come in weaker than expected.

The Fed raised its key policy rate by 25bps, as expected. But it surprised investors by signalling that only two further rate hikes should be expected this year (there was increasing market chatter that more were being considered).

U.S and euro zone stocks staged an-end of month recovery that enabled the MSCI US index to claw back losses, and return 1.0% over the month.

A far greater end-of-month rally occurred in euro zone stock markets, as the ECB talked down expectations of an imminent tightening of monetary policy. With regional inflation now at its 2% target, and at 2.2% in Germany, markets had been anticipating a slowdown in the central bank’s bond buying program.

A further boost to sentiment came from a reduction in euro zone political risk premia, as a Dutch national election and German local elections revealed an appetite by voters for the status quo rather than for extreme parties.

The MSCI Euro index rose 5.4% in local currency over the month, spurred on by substantial inflows of investor funds as the ‘buy euro zone’ investment story gained more adherents. The MSCI Netherlands index rose an astonishing 9.9%, and Germany was up 6.9%.

The MSCI Japan index fell -0.8% in yen terms. A political scandal over the financing of a kindergarten threatened Prime Minister Abe, and Toshiba announced a likely net loss for year end March 2017 of YEN 1 trillion ($9bn) due to write-offs at its Westinghouse subsidiary.

The MSCI U.K index rose 1.2% in GBP, with the triggering of Article 50 by Prime Minister Theresa May causing little disruption to financial markets thanks in part to a more conciliatory tone than had been expected.

Inflation rose to 2.3% year-on-year in February, thanks in large part to sterling weakness since last June’s Brexit vote. However, few believe that the Bank of England will raise interest rates before mid-2018 (at the earliest), due to the need to ensure stability in the economy as the country negotiates leaving the world’s largest free trade area.

The MSCI Emerging Market index rose 2.5% in USD, led by Mexico (helped by a stronger peso as the central bank continued to tighten monetary policy), and by India.



As of early April, U.S and global investors have had to digest a new side to President Trump: an apparent willingness to return the U.S to its former role as the world’s policeman, and an ability to conduct fruitful dialogue with the Chinese leadership. This is good news to those investors who fear an isolationist White House.

However, suspicions that Republicans cannot unite over any substantive policy issues may be proved right over the coming months as Trump attempts to push fiscal reform and infrastructure spending through Congress. In which case the unwinding of ‘Trump trade’ will resume.

But while the U.S economy continues to grow at around 2% p.a, corporate profits show year-on-year gains, and the Fed remains dovish (despite its recent talk of shrinking its balance sheet), investors are unlikely to turn any further reversal of the Trump Trade into a major correction.

Instead they will be focusing increasingly on euro zone stocks, where assurances of continuing loose monetary policy by the ECB and improving economic fundamentals combine nicely with attractive valuations. This is particularly so when contrasted with U.S valuations.

U.K stocks remain divided between the large multinationals, whose earnings are predominantly in foreign currency and whose share prices are sensitive to swings in sterling, and small and mid-sized stocks who rely on the domestic market.

Two further interest rate hikes from the U.S Fed, compared to ‘no change’ at the ECB, Bank of England and the Bank of Japan, will likely lead to a stronger US dollar over the coming months.

Tom Elliott’s Market Review and Outlook – February 2017

21 Mar
March 21, 2017

Market Review and Outlook

Review of February 2017



The MSCI World index of developed stock markets rose 2.8% in February, in US dollars, but 3.1% in local currency terms. The difference reflects slight dollar weakness over the period. The S&P 500, FTSE 100 and the MSCI World index were amongst many stock market indices that marked new all-time highs.

Driving the rally was improved global economic data. Inflation and GDP growth exceeded expectations in the euro zone, U.K and Japan. In the U.S, continued strong jobs growth has at last led to rising real wages (ie, after inflation is taken into account) and this has boosted consumer sentiment.

Also supporting Wall Street was continued optimism that the Trump administration will deliver a fiscal boost to the economy, though tax cuts and increased Federal spending, and also tear up many business regulations.

U.S Bank stocks were particularly strong on anticipation of a reversal of some of the post-2008 regulations that have been imposed on them. Furthermore, higher interest rate expectations have let market analysts to predict a rise in the difference between the rate at which banks borrow their funds, and the rate that they lend on to customers. An increased ‘spread’ will boost banks’ profits.

Goldman Sachs, which currently has six alumni in senior positions in the White House, saw its share price rise by 8% over the month.

Warnings by the Fed that strong U.S economic data might well lead to a March rate hike did little to curb investor enthusiasm, instead the warning was taken as evidence of strength in the underlying economy.

A proposed bid by Kraft to acquire Unilever for $143 bn was leaked, and quickly rejected by Unilever.

The MSCI Emerging Market index rose 3.0% in USD, 1.8% in local currency. India, Taiwan, Turkey and Brazil were notable out-perfomers.

While core government bonds tended to be flat over the month, the spreads of French bonds over German bunds widened sharply as the French election campaign produced yet more surprises. Investors fear Le Pen, of the Front National, will face little creditable opposition and will become President in the second round, in May. She has suggested leaving the euro, and that French-issued bonds be automatically re-denominated into francs.



After a strong start to the year, global stock markets appear ready to pause for breath. Investors might use a weaker oil price (down to $47 at the time of writing) and recently reduced official estimates of Chinese economic growth this year as justification for ‘concerns over global growth’. Political risk, whether from the unpredictable President Trump or from European elections and Brexit, might be triggers.

Fed rate hikes are unlikely to be a trigger. Three are priced in by the market for this year, the first being in March. Indeed, given the record of the Fed in recent years we may see it raise rates more cautiously than it has led the market to expect.

Any stock market correction is likely to be short and reversed quite quickly, given the generally benign global macro-economic environment that supports corporate earnings growth. Business and consumer confidence is improving in the U.S, euro zone and Japan, with many economists expecting an acceleration of growth in the U.S this year as Trump pushes tax cuts and business deregulation through Congress.

Euro zone and Japanese stocks offer better value than those of the U.S, but American companies will be the most exposed to the coming Trump fiscal and regulatory stimulus.

U.K economic growth is likely to slow as inflation impacts on real wages, and investors might want to focus on FTSE 100 multinationals that benefit from primarily overseas earnings. A further fall in sterling is likely as Brexit negotiations reveal the limited options open to the U.K government, giving a further boost to the FTSE100 multinationals.

Government bonds will rally on any short-term correction, benefiting from their safe-haven status. But with steadily rising inflation in the U.S and Europe, and the Fed already set on a long term path to ‘normalise’ its key policy rate, the outlook for the asset class over the next year to 18 months doesn’t look promising. Investment grade corporates might be a better option, or actively managed bond funds that can use derivatives.

Tom Elliott’s Market Review and Outlook – January 2017

07 Feb
February 7, 2017

Market Review and Outlook

Review of January 2017



The MSCI World index of developed stock markets rose 2.4% in January, in US dollars, but 1.3% in local currency terms. The month had a very strong start, with many major stock market indices reaching a series of consecutive new highs before a bout of dollar weakness led to stock market uncertainty over the second half of January.

Investors were cheered by ongoing U.S economic data, that showed the economy growing at an annualised rate of 1.9% in the final quarter of 2016, and strong consumer confidence and jobs data. Economic data in the U.K, Eurozone and Japan also came in generally better than had been expected while China reported stronger-than-expected fourth quarter GDP growth of 7% at an annualised rate.

The strongest major stock markets were in Asia, with the MSCI Hong Kong index up 7.8% and Singapore up 6.0% in local terms.

Of western markets, the U.S rose 2.4% as the Trump rally persisted and the S&P 500 reached a series of new all-time highs, supported by fourth quarter earnings that have beaten analysts’ expectations. Tokyo rose 1.1%.

Despite beginning strongly, European markets fell over the month with the U.K down 0.3%. Exporters were hurt by a slightly strong pound. The Europe ex UK index was down 0.6%, dragged down by Italy which fell 4.8% due to political uncertainty and the ongoing problem of a chronically weak banking sector.

Dollar weakness was triggered by President Trump after he declared his preference for a weak dollar. This runs counter to previous recent Presidents and Treasury Secretaries, who have always (officially, at least) favoured a strong currency.

Trump’s comments helped trigger a long-awaited recovery in gold, which tends to move in opposite directions to the greenback. It rose 5.2% to $1,213 a troy ounce.

The MSCI Emerging Markets rose 5.5% USD, and 4.0% in local currency terms. China rose 6.9% in local terms, Brazil ADRs were up 14% while the local market gained 7%. Greece was the weakest market, down 10%.

Bonds were broadly flat, with the Barclays Global Aggregate up 0.7% in USD.



Investors will continue to pay as much attention to U.S politics as to economic or business fundamentals, reflecting the unpredictability of the Trump administration. In making forecasts for capital markets one must, however, start with some core assumptions.

Let’s assume, then, that Trump’s fiscal stimulus will pass Congress and that the Fed will exercise caution in its rate hikes, resulting in a stronger dollar. We will then see stronger U.S domestic demand, rising inflation, and increased imports.

Emerging market companies and sovereigns will suffer from the burden of carrying approx. $9 tr of dollar-denominated debt. But fortunately for them – and for Japan and Europe –  Trump holds back from instigating a tariff war with trading partners, instead using WTO dispute mechanisms.

Populist politicians fail to take control in this year’s Dutch, French and German elections, not least because of a recovery in the euro zone economy. Sterling weakens as a ‘hard Brexit’ increases uncertainty, leading to outperformance of multinationals over domestic-based stocks.

If these assumptions prove correct, we might see over the next year to 18 months equities outperform bonds, with developed equities outperforming emerging market equities.

Within the U.S, small and mid-cap stocks might outperform large cap stocks. European and Japanese exporters might also do well.

Within fixed income, short duration and limited exposure to high yield might yield the best results, particularly given that Trump is proposing abolishing the tax-deductibility of interest payments for corporates.

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