Download Market Commentary - July 2016

Issued: August 2016
Market Commentary - July 2016
Investment Team
Richard Whitehead
CEO
[email protected]
Alexander George
Associate Director of Research
[email protected]
Chris Bellchambers
Associate Director of Investment
[email protected]
Contact us:
Matthew Wille
[email protected]
Dart Capital
4 Eastcheap
London
EC3M 1AE
Tel: 020 7283 1117
Fax: 020 7283 0891
Registered in England number 2146006;
FCA 137569. Dart Capital Limited is
authorised and regulated by the Financial
Conduct Authority.
July saw strong performance from global equity markets, with investors willing to
overlook the heightened political risk brought about by “Brexit” and instead focus on
continued loose monetary policy by Central Banks and growing signs of stabilisation
in key Emerging Markets.
Pleasingly, some stability returned to the UK political picture over the month with
Theresa May, seen by most as a steady pair of hands when compared to other
leadership candidates, elected by the Conservative Party as their new leader.
However, the task of extricating the UK from the EU remains likely to be a long and
drawn out process while survey figures indicate that the uncertainty has already
caused a downturn in both the manufacturing and services sectors. Most notably,
the purchasing manager indices (PMI) for the services sector showed output growth
slowing to its lowest rate in over 7 years. Despite the Bank of England’s Monetary
Policy Committee (MPC) deciding to delay dropping interest rates in their July
meeting, the dovish tone struck by the Committee helped drive Gilt yields lower over
the period as the market priced in a rate cut, along with further quantitative easing
(QE), at the Committee’s next meeting. With an interest rate cut on the horizon and
expectations of the next rate rise pushed back to the next decade, the 10 year Gilt
ended the period with a yield of only 0.69%, having reached as high as 1.4% on the
day of June’s referendum. The month saw a significant bounce back for small and
mid-cap UK stocks as investors cheered the improvement in political stability, with
the NUMIS Smaller Companies index gaining 6.9% over the period while MSCI United
Kingdom Large Cap had a more muted gain of 2.6%.
The first estimates for the second quarter indicated that the US economy grew at an
annualised rate of 1.2% over the period, which fell below the market’s expectation of
2.5% growth. A deeper assessment of the data showed a continuation of the trend
over recent years of household consumption remaining resolute while, in contrast,
corporates continuing to show reticence in deploying their capital. This divergence
was particularly stark over the second quarter with consumer spending growing at
an annualised rate of 4.2%, while business investment actually shrank 9.7% when
assessed on the same basis. The job market remains in reasonable shape with
continued
287,000 jobs added in June, well above the number of jobs required to keep the unemployment rate constant. In spite of headline
economic statistics, which indicate a relatively buoyant domestic economy, there remains a feeling of discontent across much
of the electorate towards the current economic status quo. This is shown no better than by the success of Donald Trump in the
electoral race with the Republican nominee’s populist policies having struck a chord with lower earning US workers, who have
seen their income levels stagnate since the onset of the financial crisis. This increase in wealth inequality is illustrated by the below
chart. Although the domestic economy is growing at a reasonable rate, the US Federal Reserve have indicated that more than one
interest rate hike is unlikely this year, as sluggish global growth and the continuing ramifications of “Brexit” give the Committee
members cause to delay significant further tightening. The S&P 500 gained 3.6% over the month.
$50
72%
$45
71%
Wages in thousands
$40
70%
$35
69%
$30
$25
68%
$20
67%
$15
66%
Ratio of median to average
Average and median wages
$10
65%
$5
$0
64%
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Average
Median
Ratio
Source: Social Security Administration
Median income is the amount that divides the income distribution into two equal groups, half having income above that amount,
and half having income below. The average income is the amount of total income earnt by workers divided by the number of
workers within the workforce. The decline in the ratio of median worker income to average worker income indicates growing
income inequality between lower and higher paid workers.
Counter to the fears of many political commentators, the UK electorate’s decision to leave the EU actually appears to have caused
a retrenchment in the level of popular support for parties in other EU states seeking independence from the trading bloc, with
voters likely seeing the upheaval caused by the result of the UK vote as a warning sign for their home states. The first estimate
for Eurozone GDP showed the currency bloc grew at 0.3% quarter-on-quarter (q-o-q), a halving of the first quarter’s growth rate,
with the bloc’s second largest economy, France, experiencing no growth over the period. The unemployment rate remained at
10.1% over June, dragged higher by the stubbornly high rates in southern members such as Spain where the unemployment rate
stands at 20%. The European Central Bank (ECB) kept base rates at -0.4% in their July meeting. Although the Bank’s bond-buying
programme has been effective in pushing down yields on both government and corporate bonds, it is yet to feed through to
inflation getting close to the ECB’s 2% target. MSCI Europe ex-UK returned 4.1% in local currency terms over the month.
Emerging Market assets had a strong month, bolstered by continued signs of stabilisation in both China and Brazil. Official
government statistics indicated that the Chinese economy grew 6.7% in the year to the end of June which was slightly above
market expectations. However, the figures did show that the investment from private businesses continued to slow in the face of
an uncertain economic outlook while, conversely, public sector spending ramped up as part of the government’s stimulus package.
We remain wary that financial markets have not reacted to the gradual weakening of the Renminbi against the US Dollar over the
year to date, and see this as a tangible risk factor for markets over coming months. The MSCI Emerging Markets index gained
4.7% in US Dollar terms over the period.
continued
Having staged a strong recovery since reaching its lows in January, the oil price came under pressure over July as concerns
regarding over-supply reasserted themselves. Stockpiles of oil have continued to rise as production growth has been boosted by
newly active fields which were sanctioned as recently as two years ago when the oil price was more than $100 per barrel. However,
expectations remain that over the medium-term the market will return to a higher equilibrium price as price-sensitive producers cut
back on capital spending. The oil price, as measured by Brent Crude, fell 13.7% in US Dollar terms over the period.
Over recent months our Investment Committee have revisited the investment case for gold, with indications that the US Federal
Reserve will further delay raising interest rates this year along with the imposition of negative interest rates in Japan and across
large swathes of Europe, all having the potential to drive increased demand for gold as a store of value. Furthermore, we believe
that the upcoming US election could cause investors to seek alternatives to the US Dollar given the likelihood that either a Clinton
or Trump presidency would likely see higher fiscal deficits. The gold price rose a moderate 2.2% over the period.
Asset Class Performance – End July 2016 (in Sterling terms)
Asset Class
Dart Position
1 Month
3 Months
12 Months
Index
Cash
+0.04%
+0.12%
+0.50%
Fixed Interest
+1.88%
+9.28%
+10.75%
Equities - UK
+3.80%
+6.93%
-0.28%
Equities - International
+5.02%
+14.25%
+15.71%
MSCI All Country World Index ex UK in GBP
-3.18%
-4.96%
-0.22%
Financial Express UK Property Proxy in GBP
+0.04%
+0.12%
+0.50%
Property
Alternatives
Bank of England Base Rate
iBoxx Sterling Gilts All Maturities in GBP
MSCI UK All Cap in GBP
Bank of England Base Rate
Benchmarks are capital return which excludes income
Month to 31 July 2016
Treasury yields data supplied by Thomson Reuters
Overweight
Neutral
All other performance data supplied by Financial Express Analytics
Dart positions based on Dart mid risk strategy
Underweight
This document does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or
needs of individuals.
This research has been prepared with all reasonable care and is not knowingly misleading in whole or in part. The information herein is obtained from sources
which we consider to be reliable but its accuracy and completeness cannot be guaranteed.
The opinions and conclusions given are those of Dart Capital Limited and are subject to change without notice.
The value of securities and the income from them may fluctuate. No responsibility is taken for any losses, including, without limitation, any consequential loss,
which may be incurred by anyone acting on information in this document.
It should be remembered that past performance is not necessarily a guide to future performance.