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.