Mid year outlook

It’s been an interesting start of the year for investors, with a number of key events happening in the first six months;

5 Jan – Bitcoin posts highest price for year of $16,939

2 Feb – Higher than expected US jobs report numbers spark fears of monetary tightening and a market sell off

6 Feb – Bitcoin shows its lowest price, $6,914

1 Mar – President Trump announces tariffs on steel and aluminium imports to the US sparking fears of US/China trade war

21 Mar – US Federal Reserve raises rate by 0.25%

6 Apr – Sanctions imposed on Russia by US take effect

10 May – Bank of England keeps base rate on hold

The speed of technological change is accelerating. It can be unsettling but among all the change, we’re seeing more opportunity and more innovation than ever before. So we think it’s an exciting time.

It’s important to try and embrace change and a world of new opportunities. We take this approach every day and relentlessly seek those investment opportunities that could potentially help you grow your wealth for the future.

Long-term investment opportunities depend on the health of the global economy and key market trends.  Making informed and disciplined investment decisions depends on understanding these elements. This is a core element of the investment process we follow, and it underpins our success.

Typically, we will look to the US as a barometer of global health.

We see three key pieces of data that suggest the US economy is healthy:

1. US manufacturing is in good shape

Manufacturing is one of the key bases for the US economy. It reflects the health of exports and the consumer sector, and has a major impact on employment.

ISM Manufacturing Index – 57.3, April 2018

(The ISM Manufacturing Index measures manufacturing activity based on a survey of senior managers in the sector. A value of above 50 shows that manufacturing is expanding, which is a positive indicator for the economy as a whole.)

(Source: Reuters Eikon/Datastream)

2. Money is available for companies to expand

Raising finance for research or expansion can be vital for companies to expand. Companies that expand spend more money on materials and employ more people, which adds to economic growth.

Financial Conditions Index – 98.7m, April 2018

The Financial Conditions Index measures how easy it is for companies to get money for expansion, either from borrowing or by attracting new investment. A figure below 100 indicates that there is money available for corporate expansion.

(Source: Goldman Sachs)

3. US corporate profits are rising

When companies make money, they generate wealth for the economy as a whole. This can be through paying higher dividends to shareholders, increasing the pay of workers or by reinvesting profits to expand the company.

Return on equity for S&P 500 companies – 14%, April 2018

Return on equity is a ratio showing how much money a company is making in relation to how much shareholders have invested. The S&P 500 tracks the share price of America’s 500 biggest companies. Historically these companies have achieved an average return on equity of about 10%. A figure of 14% shows that US companies are making above-average profits, which should continue to fuel US economic growth.

(Source: Reuters Eikon/Datastream)

Markets are nimble, quick and globally connected. They respond quickly to signals sent from all over the world, but ultimately depend on humans for how they are used.

They also depend on speed of information for their operation. As the exchange of information has got quicker, so has the complexity of markets. As we saw at the start of the year, sometimes the market needs to rebalance itself. However, innovation and evolution mean that things become more efficient as time goes by.

To succeed in today’s investment markets you need to keep your models up to date or risk being left behind. Here’s our summary of the output.

US equities (neutral): Our US equity exposure is centred on large companies in the S&P 500 index.

UK equities (positive):  We believe UK equity will be supported by the global economy despite weakness in the UK

European equities (positive): We continue to favour European equity, based on earnings potential

Japan equities (positive): Valuations of Japanese equity remain attractive

Government bonds (negative): Long-term returns from government bonds are likely to remain low

Investment grade bonds (negative): We prefer corporate debt to government bonds, but have an overall low allocation

High yield bonds (positive): We prefer high yield bonds issued by banks, which we see as offering a good risk/reward profile

Emerging markets debt (positive): Emerging markets debt is likely to benefit from steady growth in emerging economies

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