Broomer's Blog

From the category archives: Outlook

Outlook

Outlook June 2020

The recent moves in the markets have been astonishing, both the collapse and the subsequent recovery. The accelerated pace of this cycle has caused this to be a very challenging period to be managing money. The economy has taken an enormous hit, yet we are pleasantly surprised to find the S&P 500 nudging back into positive territory for the year. Markets have recouped their losses due to aggressive monetary and fiscal responses and the gradual emergence of the main global economies from their shutdowns. However, a myriad of uncertainties and risks remain.

The economic numbers have been derailed so badly that it is impossible to make sense of them. For instance, the improvement in the US jobs report on Friday was much better than economists had been expecting. The BLS, which generates the report, acknowledges difficulties in collecting data during the crisis. Nevertheless, the markets leapt on the announcement which underlines what we already knew; the US is reopening its economy.

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Outlook March 2020

It is becoming increasingly apparent that this virus, while serious, is not as deadly as some of the early figures suggested, as many cases seem to have gone unreported. Across the population the death rate is probably going to be around 1% for those infected. Whilst the haunting news of the death of the 34-year-old Li Wenliang, the whistleblowing doctor from Wuhan sticks vividly in our minds, this seems thankfully an exceptional case. This is a disease that predominantly takes the old and the sick. Though all age groups remain at risk, and many will require hospital treatment, 99% will pull through. The Koreans have been assiduous in their testing and identifying all those who have the virus. I am no virologist, but looking at the mortality rates there, I reckon someone in my age group (I turn 52 on Thursday) has approximately the same risk as dying from Covid-19 as any other disease or accident that might befall me over the course of the coming year. According to the bandolier.org.uk website, UK men in the ...

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Outlook December 2019

Recession risk remains heightened though the odds of one forming have dropped as the economic data shows signs of stabilising. The consumer is holding up and index of Leading Economic Indicators may be about to turn up as base effects kick in. PMIs remain soft, particularly in manufacturing but at least trajectory is less worrying. The yield curve has normalised but this provides no comfort – it always has done ahead of a US recession, which has typically lagged an inversion trough by12-18months. We can only wait with fingers crossed.

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Outlook September 2019

It is fair to say that it has been a strange summer. Greek government bond yields have traded below those of the US. Sterling has strengthened on the hopes of a Corbyn government. President Trump labels his own central banker as an enemy. The Brexit negotiations have transcended farce - as they say, even Baldrick had a plan. The British government would collapse if only the opposition would allow it. China has been labelled a currency manipulator by the US on concerns that a weak yuan gives it a trade advantage, yet the PBoC has been intervening to support its currency! If you are finding all this a bit baffling, join the club.

Economic conditions have been steadily deteriorating throughout the year and global manufacturers clearly face difficulties. Forecasts of 2019 global GDP growth have been pared back from 3.6% at beginning of the year to 3.2%. The trade war is a cause of the slowdown, although not the only one. The malaise seems to be deeper than this and may be centred on Chinese attempts to regain control of their money supply as they clamp down on their shadow banking system. Rumours of a cash shortage are emerging. Note that Chinese growth is not dependent on exports, over 70% of GDP growth alone comes from domestic consumption. US exports constitute only 4% of the economy. Tariffs are unhelpful for the Chinese, but are not the root cause of the slowdown.

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Outlook June 2019

Investors continue to fret about the growth outlook. The impact of the trade war is beginning to be felt and the recent escalation, caused by Trump's move to lift Chinese tariffs to 25%, compounds the issue. Even though economists predict that the economic effects of the dispute should be mild, the pain is appearing across important sectors of the S&P 500. While the first quarter US GDP print was strong at 3.2%, this may have been flattered by a low deflator reflecting the delayed response to the collapse in the oil price in Q4. Remember, the economy is still supposed to be benefitting from the effects of last year's stimulative package and this will soon start to wane. Some of the leading indicators such as the PMI/ISM have weakened (albeit from high levels) although consumer confidence remains buoyant.

Today's supply chains are complex and international, industrial businesses in places like Japan and Germany have felt the consequences of the US-China trade dispute. For instance, the German manufacturing PMI slumped to 44.1 in May, a fifth consecutive month that the index has indicated contraction. Global freight indices reflect this slowdown in trade.

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Outlook March 2019

The recovery in markets has been remarkable. Having had its worst December since the Great Depression, the US market had its best January since 1987. The volt face by the US Federal Reserve has lifted the spectre of a continued programme of interest rate increases and the chatter on the Street is that even QT may be curtailed towards the end of the year. Despite the size of Trump's stimulative package, the economy appears to have been acutely sensitive to tightening financial conditions and the trade war is acting to complicate matters further.

The precipitous falls in economic numbers during Q4 appear to be stabilising and some of the more forward looking indicators have bounced, alleviating fears of recession. Having got perilously close, the Treasury yield curve is now some distance from inverting [although the overnight dovish Fed announcement has flattened the curve once again]. All this has allowed the VIX volatility index to return to more relaxed levels.

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Outlook January 2019

"Britain can be cancelled, top EU lawyer says" so read a headline on the CNN website. It certainly feels like it. A divided nation, a crippled Government and a Leader of the Opposition who transparently covets investors' hard earned savings. The nation is crying out for strong leadership but few of our current crop of politicians come close and Parliament merely mirrors the divisions across the nation. As the old joke advises, you really don't want to start from here. It is perhaps not a surprise therefore that this has been the worst year for UK financial markets since the Great Recession in 2008 and the FTSE 100 is back down to a level first seen in 1999. Thankfully, we have positioned our portfolios with limited exposure to equities, particularly in the UK and this has helped provide some insulation for our portfolios.

Perversely, the principal cause of the markets' woes was not UK related but more global in nature and, in particular, American. Stock markets began to feel the chill draft of the US 10 year Treasury bond topping 3.2% in late September, triggering the global market correction that began in October. At the time, it appeared to be a replay of February's valuation recalibration in response to a higher discount rate. However, many weeks later, nerves have yet to settle despite Treasury prices rallying; the 10 year note is now yielding below 2.9%. Unlike in February, the hitherto market leaders have been pummelled and the ecommerce giants seem have lost their air of invincibility. This is despite Q3 earnings leaping by 24% and President Trump's tax cuts accounting for only part of this bounty.

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Outlook Sept 2018

The FTSE All Share has drifted this year but decent money has been made from international stocks. The MSCI World has been driven higher principally by the performance of US stocks which in turn have been driven by the ecommerce stocks. The US economy is responding to Trump's spending package and earnings are benefiting. EPS growth is exceeding 20% yoy, a little less than half of which came from Trump's tax cut. Encouragingly, corporate revenues are up 9.5% over the period, well ahead of nominal growth rates. Speculative hunger appears to be significant: those who only lost half their shirts on cryptocurrencies, now have the chance to lose the rest in cannabis stocks. Piling into Facebook and Amazon is far more rational in comparison and who are we to stand in the way of such momentum. Expectations of 10% EPS growth next year sounds demanding but could be possible as a virtuous circle of confidence, spending, investment takes hold.

We were right to fear tightness in the oil market as we did at the beginning of the year. The oil industry needs continual investment to maintain supply and the freeze on development has had an inevitable consequence once the stock overhang had been dealt with. We highlighted last quarter about some of the secular changes that could worsen the inflationary outlook. Now CPIs are ticking up globally as energy prices work their way through. The effects of the trade tariffs are yet to be reflected.

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Outlook March 2018

A correction is normally defined as a fall of between 10% and 20%, January's downturn just qualifies with the S&P falling by 10.1%. The adage that markets head higher on the escalator and come down in the elevator could scarcely be more apt. Note that the S&P 500 is leading the global rebound from February's lows and already the tech sector is breaking new ground.

This stumble took us back only to where we were in the autumn and it has done little more than blow off the market froth that had developed over recent weeks. If global markets begin to run again (as we suspect they might) this episode will quickly be forgotten. The catalyst for the fall was the US Treasury market where yields had surged 45 bps over the first six weeks of the year. They have since stabilised. One board member of the Federal Reserve described this episode as "small potatoes". We absolutely concur and fear that it is only a taster of might be to come.

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Outlook December 2017

While the mood in the main developed markets does not feel heated, professional investors are becoming optimistic and momentum in markets is clearly building. The world index's 13-successive months of positive gains is unprecedented, though this may be more to do with the dollar's weakness than investor euphoria (or Donald Trump for that matter). Money is pouring into more peripheral markets, for example: $450m for a da Vinci painting of doubtful provenance, Bitcoin (enough said), and a rampant IPO market in Hong Kong. The Fed may be reversing QE but let's not overlook that the BoJ and the ECB have pumped $2tr into the system over the last 12 months. These liquidity flows are now below the peak hit last year but the dollar's weakness and easier credit conditions have helped keep the monetary conditions very loose.

Trump is clearly a man where scant attention should be paid to what he says and it is far more productive to watch what he actually does. Thankfully, there is much less of the latter than the former. His more populist policies are confined to Twitter while actual policy has been more conventionally Republican - not a great surprise given a cabinet heavy in Goldman Sachs alumni and ex-Armed Forces Generals. The tax reform bill is making its tortuous way through Congress and it would appear that both Houses have agreed to reduce corporation tax to 20%. If ratified, this is great news for stockmarkets, however, from an economic perspective the need for a fiscal boost at this juncture is at best questionable.

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