Tom Elliott’s Market Review and Outlook – November 2017

04 Dec
December 4, 2017

Market Review and Outlook

Review of November 2017


Despite a sharp fall in the value of global equities and high yield bonds mid-month, the MSCI World index of developed stock markets rose 2.2% in November in US dollars, and 2.6% in local currency terms. The iBoxx Global High Yield Index ended 0.2% up over the month.

The mid-month tremor was led by the high yield market, which saw a bout of profit taking triggered by a handful of negative, though relatively unremarkable, U.S corporate stories. However, with spreads in U.S credit very slim some investors did not want to continue to hold an asset class that appears to many to be overvalued.

Other risk asset classes, notably equities, fell in sympathy.

Uncertainty over President Trump’s ability to push tax reform through Congress, a flattening Treasury yield curve (indicating perhaps recessionary conditions ahead), and weaker industrial metals futures prices in China were also offered by market commentators as explanations for the sudden weakness in investor sentiment.

However, it didn’t take long before a recovery in stock markets kicked in, which was also seen in some credit markets.

The recovery was supported by the announcement of a fresh Rmb310 bn ($47bn) liquidity injection by the Bank of China into the country’s financial system. Investors took heart from the release of Fed minutes which appeared to suggest that the central bank was taking a more dovish approach to monetary policy.

A rally in tech and energy stocks allowed the NASDAQ and S&P500 to record yet more record highs once market sentiment recovered. European stocks, though, struggled to rebound due to country-specific themes and strong currency movements against the U.S dollar.

In Germany, the Xetra Dax index reached new highs early in November on strong domestic and euro zone economic data, but the collapse of coalition talks between Angela Merkle’s CDU and other political parties cast a cloud over investor sentiment, while a stronger euro negatively affected export-led sectors.

The FTSE 100 was negatively affected by weakness in commodity stocks, and the strengthening pound after Prime Minister Theresa May made concessions in Brexit negotiations which were seen as helping to improve the chances of a negotiated settlement.

Of note was the Hong Kong stock market, with the MSCI Hong Kong index up 3.5% making it easily the best performing developed stock market. The stock market is up 32% since January, benefitting in part from mainland Chinese investors who see investment in HK$ denominated assets as a hedge against a possible future devaluation of the renminbi.

The MSCI Emerging Markets index rose 0.2% in dollars, and fell 0.4% in local currency terms. Middle Eastern markets were particularly affected by fears that Lebanon may become a new battlefield in the proxy war being held by Iran and Saudi Arabia.

Nationwide reported U.K house price inflation in the year to November at 2.5%, unchanged from September. Most housing experts suspect that central prime London will continue to be the most vulnerable part of the market. The Chancellor’s Autumn Budget in November lifted stamp duty on properties below a certain value for first time buyers, so supporting demand at the lower end of the market. He also announced a raft of measures intended to boost the supply of new houses.


The swift recovery in many stock credit markets after the mid-November fall illustrates what we have been saying, for most of this year, about risk assets in general.

So long as central banks keep interest rates remain low, and strong global growth feeds through into corporate earnings growth, there is little risk of a sustained bear market developing in the near term.

But such scenarios to not persist indefinitely. What might eventually cause a sustained bear market? There are two schools of thought.

The primary risk is a self-inflicted recession in the U.S. This, the idea goes, comes from the U.S Fed raising interest rates too high, too fast, and so shutting down growth. This risk is arguably reflected in the market by the flatter U.S Treasury yield curve, which has been much written about in recent weeks.

Another scenario -effectively the opposite to the above- is that inflation accelerates, and central banks react too slow to address the problem, perhaps deliberately in order to alleviate the weight of debt on governments’ balance sheets. This would lead to a jump in bond yields, and as risk free rates increase investors will jump from risk assets such as equities. This fear is perhaps reflected in the tight pricing of index inked government bonds.


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.

Tom Elliott’s Market Review and Outlook – October 2017

08 Nov
November 8, 2017

Market Review and Outlook

Review of October 2017


The MSCI World index of developed stock markets rose 1.9% in October in US dollars, and 2.5% in local currency terms, with gains spread across all major markets. Credit, oil and industrial metals all enjoyed a strong month while gold was unchanged.

This was the twelfth consecutive month of positive returns for global stock markets. The S&P 500 and other key U.S stock market indices, the FTSE 100, and the German Dax index all reached new all-time highs. In Japan the Nikkei 225 recorded a run of 16 successive daily gains for the first time since 1961, and ended the month at a two-year high.

Even in Spain, which saw the outbreak of a major constitutional crisis following an illegal bid for independence from Catalonia, share prices rose and only slightly underperformed the euro zone average.

Driving the rally were a mix of political news and positive corporate and economic data. In Japan, prime minister Shinzo Abe won re-election on the back of promises of structural economic reform. With the Japanese economy now growing at an annualised rate of around 2.5% (impressive for a country with a shrinking population), investors believe that the country’s politicians now have a benign environment in which to pursue difficult policies.

In the U.S, the Senate and House of Representatives both passed tax reform plans, with changes to corporate tax being a key feature. These must now be harmonised. While some are calling for a tax neutral reform to be implemented, we may see a possible $1.5 trillion tax cut agreed. This would give a significant fiscal boost to the economy though at the expense of a higher budget deficit.

Corporate news was dominated by strong second quarter earnings results, particularly from large U.S tech companies. Stronger than expected economic growth in China has helped developed economies grow their exports.

Economic data included an upgrade to global GDP growth estimates from the IMF, to 3.6% for 2017 and 3.7% for next year. Earlier this year, it had expected just 3.2% growth in 2017. However, it did warn about excessive levels of debt in the world economy, which may make any negative shock to the global economy worse through triggering forced asset sales.

The Fed all but promised an interest rate hike in December, and begins tentatively scaling back its quantitative easing (QE) policy this month. The ongoing tightening of U.S monetary policy, together with strong U.S economic data, was positive for the U.S dollar in October.

The ECB announced that it would extend its bond buying program well into next year, albeit at a more modest rate of EUR 30bn a month from January. By the month end, investors had become convinced that the Bank of England would raise its key policy rate by 25bp in early November, the first hike in over 10 years, and which duly happened. Sterling fell over the month, in part on growing apprehension that Brexit negotiations with the E.U on future trading relations may result in a ‘hard Brexit’, or in no agreed deal at all by the time the U.K exits the E.U in March 2019.

The MSCI Emerging Markets index rose 3.5% in dollars, 3.9% in local currency terms, led by the Asia region.


John Templeton, the famous emerging markets investor, has written that ‘bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria’. Are we now approaching the final stage?

It is easy to be fearful of risk assets at present, given the high price/ earnings valuations of equities by historic standards, and – in credit markets – the small spread over core government bonds that high yield currently offers.

But where is the euphoria, and where are the snake oil salesmen promising that ‘this time it’s different’? This unloved rally in risk assets does not have any cheerleaders, and persists despite much investor scepticism.

Its key support -as we wrote last month – comes from the lax monetary policy of central banks, which is keeping risk-free rates remain low. After all, where can stock market investors currently put their cash and receive a return higher than inflation, if they were to sell?

However, this rally will end sooner or later, and investors must avoid complacency. Many believe that a sell-off in U.S high yield will be the first sign of a broader downturn in risk assets, since many holders of the asset class can’t absorb much of a price drop given the low yields, forcing them to rush to the exit.

Any investor wanting to make their portfolio a little more defensive may want to increase their exposure to low-return risk free asset classes now, rather than wait for sentiment towards risk assets to change, so should discuss this with their adviser.

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.

Tom Elliott’s Market Review and Outlook – September 2017

04 Oct
October 4, 2017

Market Review and Outlook

Review of September 2017


The MSCI World index of developed stock markets rose 2.2% in August in US dollars, and 2.3% in local currency term.

This was the eleventh consecutive month of positive returns for the index. In the U.S, all-time highs were recorded for the S&P 500, the NASDAQ and -thanks to a very strong rebound in recent weeks- for the Russell 2000 index of smaller U.S companies.

However, gains were led by the euro zone and in particular by Germany and France, as investors focused on strong economic data and the prospect of economic reform in France under President Macron. They looked through the disappointing German elections, that saw Angela Merkel win a fourth term as Chancellor but which also saw the right-wing AfD party win seats in the Bundestag for the first time.

Investors also shrugged off more rhetorical flourishes between North Korea’s President Kim Jong-un and President Trump, and a relatively hawkish tone from the U.S Federal Reserve Bank following its policy meeting.

Supporting risk assets was generally strong economic data, that showed all major economies enjoying solid economic growth for the first time since the financial crisis of 2008.

At the end of the month the U.S second quarter GDP estimate was raised to 3.1% at an annualised rate, ahead of the euro zone at 2.6% and Japan at 2.5%. China has also surprised analysts, coming in with 7% growth over the period. Stronger GDP growth should feed through into improved corporate earnings estimates.

Corporate news included the announcement by the Japanese government that it would be selling a further $12bn worth of its holding in Japan Post, equivalent to 11% of the company. Japan Post is the country’s largest bank, its largest insurer and the largest employer outside of the civil service.

Speculation returned of a merger between Glencore and Rio Tinto, to create a mining behemoth. At the end of September President Macron of France signalled a more relaxed approach to foreign mergers and takeovers when he approved the merger of high speed train manufacturer Alsthom with the rail unit of Siemens of Germany. The new company will have annual revenues of around EUR 16bn.

Urged on by Boeing, Washington proposed punitive tariffs of 219% on Bombardier’s discount sale of jets to a U.S airline. This drew threats of retaliatory action by Canada and the U.K on their purchase of Boeing planes. Bombardier employ 4,000 workers in Belfast, a key area of support in Norther Ireland for the DUP. The DUP is helping to keep the Conservative Party in power in Westminster.

On the currency markets, the euro peaked at $1.21 on 8th September, but then weakened against a resurgent dollar. Indeed, one of the surprises of September was the rally in the dollar on the prospect of tighter Fed monetary policy and stronger economic growth. The greenback ended the month above its 50-day moving average for the first time in six months, which FX traders treat as a bullish signal.

The MSCI Emerging Markets index fell 0.4% in dollars, but was up 0.4% in local currency terms. Turkey fell 10%, and Greece by 14%, but Russia was up 5% thanks to the stronger oil price.


Until September it had appeared that the wave of separatism and nationalism that had risen last year had begun to recede in 2017. Right wing parties had failed to gain power in the Netherlands and in France, while in the U.K the government is steadily moving towards a ‘soft’ Brexit.

But with the electoral success of the AfD in Germany, and now the very real prospect of Catalonia breaking away from Spain, political risk has returned to Europe. Meanwhile, on the continent’s south east lies Turkey, a NATO member and a long-running candidate for E.U membership, which is looking less and less like a functioning democracy. It in turn feels threatened by the success of the neighbouring Iraqi kurds in their forming a coherent state, and which a fortnight ago voted overwhelmingly for full independence from Iraq.

It is fortunate that the euro zone GDP growth is growing at a good pace, and unemployment is coming down (though still 9.1%). Stock market valuations remain favourable relative to the U.S, and to euro zone government bonds and cash rates.

U.S news flow is currently more positive. True, Wall Street anticipates a further interest rate hike this year, but weak core PCI (the Fed’s preferred measure of inflation) may yet scupper that. Meanwhile hope of a corporate tax reform has returned to Washington, and with that the prospect of an increase in corporate earnings and dividends to shareholders.

As we have written before, if global monetary policy remains loose and economic growth strong, a sustained sell-off of risk assets appears unlikely. True, U.S equities and credit markets world-wide are richly priced. But until bond yields and/or cash rates rise, where else does an investor go for income?

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.

Tom Elliott’s Market Review and Outlook – August 2017

07 Sep
September 7, 2017

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.

Tom Elliott – Update on North Korea

14 Aug
August 14, 2017

Tom Elliott – Update on North Korea

This week’s increase in tension between North Korea and the U.S over North Korea’s nuclear missile programme, contributed to a rally in defensive assets on global financial markets.

This reminds us to remain diversified in our investing habits. We should also be aware of the risk of responding to geo-political shocks by selling assets: too often we find ourselves selling at the moment of highest fear, only to be out of the market as a rebound in stock market prices takes place as tensions wind down.

This week’s beneficiaries have been oil, the Swiss franc and the Japanese yen, and quality government bonds. Global stock markets fell. The VIX index of implied future volatility on the S+P 500 index (the so-called ‘fear index), jumped to a three-month high of over 15, and we saw growth-orientated stocks under perform their value counterparts across developed stock markets.

There are few better illustrations as to why a long term investor, keen to maximise returns while keeping portfolio volatility low, should hold core government bonds in their portfolio as part of a balanced portfolio.

Exposure to the Swiss franc and Japanese yen perhaps best comes through ownership of global stock and bond market funds, or through currency Liquidity funds.

A global stock market fund will have its fair share of value and growth companies, unlike -say- the FTSE 100 index which is predominately value-orientated with its bias towards energy, mining and financial, or the Japanese TOPIX which is growth-orientated with a predominance of consumer goods companies.

In all likelihood the North Korea problem will persist for years to come, with the U.S, and increasingly China, attempting to contain and restrain Kim Jong-un. He knows that any use of missiles – nuclear-tipped or not- against the U.S or one of its Asian allies, risks a retaliation that will lead to the end of his family’s rule of the country.

Therefore, there is a high probability that the current tension will ease off, and the recent flight into defensive stocks will reverse.

It is not just North Korea that has the potential to surprise investors. Whether it is a credit crunch in China, policy error from the Fed, or fear of an over-valued U.S stock market, there are many reasons to maintain a balanced multi-asset portfolio that has exposure to defensive asset classes and currencies.

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.

Tom Elliott’s Market Review and Outlook – July 2017

11 Aug
August 11, 2017

Market Review and Outlook

Review of July 2017


The MSCI World index of developed stock markets rose 2.4% in July in US dollars, and 1.4% in local currency terms, as global investors continued to seek risk assets. This was in part driven by Janet Yellen, the head of the U.S Fed, who suggested that low U.S inflation may modify interest rate policy.

Lower U.S interest rate expectations contributed to a fall in the dollar, and to a rally in oil and many other commodities from the second week in July. There was also strong demand for dollar-denominated high yield bonds as risk-seeking investors sought to gain from a high yield and from a future recovery in the dollar.

Of the major stock markets, the U.S continued to dominate. The MSCI U.S index was up 2.0% in local terms, and 11.4% year-to-date. U.S stocks were helped by the weak dollar flattering export earnings in the second quarter’s corporate earnings results.

By the end of July, 56% of S&P 500 companies had reported their results, representing 70% of the index’s total market capitalisation. Of these, 73% had come in above expectations.

The MSCI Europe ex UK index was up 0.5% in local currency, and 3.1% in dollars. The euro gained from comments made by the ECB’s chief Mario Draghi, in which he said that the central bank did not view the currency’s steady appreciation this year as an issue to worry about or that might alter ECB monetary policy.

There were some strong performers from smaller exchanges, as the recovery in the euro zone economy continued to drive investor appetite for the region’s stocks. The Netherlands rose 3.7% and Italy 4.0%, in euros.

However, the chief reason for the relatively modest stock market gains from the region was the hit taken by the German auto sector after it was accused of operating a cartel in areas including technology innovation and in auto parts. This contributed to a 1.5% fall in the MSCI Germany index in euros.

The MSCI U.K index rose 1.1% in sterling terms over June, and 2.6% in dollar terms. Investor sentiment was somewhat helped by reports of a more sympathetic attitude taken by the government towards the needs of business, as Brexit talks with the E.U get under way. However, living standards continue to be squeezed: consumer spending was up by 1.1% in the second quarter over the same period last year, fuelled by increasing borrowing and reduced savings. Real average take-home pay was down 2.7% over the same period (this figure includes inflation effects as well as tax and social security changes.

MSCI Japan rose 0.3% in yen, and 2.0% in dollars.

The MSCI Emerging Market (EM) index rose 6.0% in dollars, and 4.9% in local currency terms. Gains were evenly spread, with Brazil, Russia, India, China, South Africa and Turkey all performing well. A rally in commodity prices helped, as did the prospect of ‘lower for longer’ U.S dollar borrowing rates.


President Trump’s failure, so far, to push through Congress any meaningful legislation bodes ill for his plans for tax cuts and infrastructure spending. This in turn has reduced analysts forecast for U.S GDP growth over the coming years, from 3% – 4%, down to around 2%, and suggests that the Fed may be still further surprised by low U.S inflation data despite the increasingly tight labour market.

Therefore, and as discussed last month, the risk to investors in global equities and other risk assets probably comes less from a sudden unwinding of the loose and unorthodox monetary policies that have supported asset prices since 2009, and more from market-specific factors.

These might include high valuations on the S&P 500 (where forward and cyclically adjusted price/ earnings ratios are at record highs), and a relatively small number of sectors -led by tech – pushing the S&P 500 to new highs this year. Both have, in the past and with the benefit of hindsight, signalled unsustainable bubble conditions.

However, with bank account cash rates and bond yields so low in the U.S and other major economies it is difficult to see where the money from any stock market sell-off will go. With global GDP growth running at around 3.5% (respectable), and corporate earnings continuing to grow in the U.S, Europe and Japan, any market sell-off may well be met with a sharp recovery rally. Such as happened on global stock markets after the sell-off of July and August 2015, as fears faded that a surprise devaluation by China marked the imminent collapse of that country’s economy.

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.

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.