Global Equities Q2 2016
The quarter under review has been a difficult one for global equity markets to make much progress. Investors remain focussed on Central Bank actions and the period has been dominated by the EU Referendum in the UK. The FTSE 100 index managed a reasonable period in April with a 3.8% rise, however as May progressed and into June, nerves began to build ahead of the vote and from that peak the market bottomed at -7.6%. Overall on the quarter it is now registering a slight rise.
US equities have once again surprised with investors seizing on an improvement in a number of global economic indicators. Crude oil has become a key barometer for the health of global GDP and the price has risen per barrel from just over $40 to $50 at the time of writing. A dovish shift in the Federal Reserve stance has also pushed back interest rate rise expectations. Some of the leading economic indicators have picked up and some housing data has also improved in recent weeks. Consumption growth is healthy in the US with stable inflation and full employment. You call the top of the current US economic cycle at your peril.
Europe has managed to avoid another Greek crisis but there have been signs recently that confidence about the economic recovery has been waning. Many European equity indices have re-visited their February lows and the precipitous fall in bond yields has hardly helped. With a ‘Remain’ vote, the UK economy could well see a sharp pick up in H2 with delayed capital expenditure pulled through. Domestic focussed stocks will perform the best with a boost to the beleaguered Banking sector. Laggards could include some of the Commodity stocks and Exporters, which will be held back by a stronger level of Sterling. Commercial Property and the Housebuilders will also be impacted by a lack of inflows into the country.
Japan has unfortunately been facing the headwinds of a strong currency which negatively impacts large swathes of export reliant industries. This has been more related to global events than the domestic situation as you would expect that with not only QE but also negative interest rates that a currency should be weak. The bank of Japan could go more negative on interest rates at some point, after all Abenomics is an experiment!
The data from China in recent weeks at a headline level has reassured investors but delve deeper and major issues remain. We believe that as the year progresses, global equity markets could once again become concerned over the country’s economic slowdown. For instance, the net employment outlook index is back down at levels seen in mid-2009. Non-performing loans are rising rapidly and the pressure on the wider financial and banking system is building. This has tempered our overall Asia allocation for fear of contagion.
In the US, the S&P 500 index has risen once again with a 1.5% rise, with the Dow Jones up just over 1%, whilst the domestically focussed Russell 2000 index performed strongly, up 3.5%. Consumer confidence is high and so are home related sales, gainers in the sector over the quarter included Wal-Mart up 5.3% and Lowes up 4.9%. Commodity related stocks continued to rally with Newmont Mining up 30%, Transocean climbed 29% and Devon Energy was up 38%. On the negative front, the rising crude oil price hit airline stocks, with American Airlines down 27% and Alaska Air also down 27%. Other decliners included The Gap down 30%, Apple down 12% on sales slowdown fears and Goodyear lost 17.5%.
The FTSE 100 index has tried to rally as a status quo ‘Remain’ vote became more favoured with Banks leading the charge. Barclays rose 23%, Standard Chartered was up 22.5% and Royal Bank of Scotland rallied 14%. Commodity stocks remained firm with Fresnillo up 30%, Anglo American up 25% and BHP Billiton was up 12%. On the negative side, Burberry released disappointing sales growth with a slowdown in the vital Chinese market causing major issues, the stock fell 17%. Other stocks to fall included Sky down 13%, Sainsbury lost 10% and Marks & Spencer continued to struggle losing nearly 9%.
Continental European markets also tried to move higher with Germany up 3% and France up 2%. Banking troubles overshadowed Italy which lost 2.5%, fallers included Unicredit down 17%, Banco Popolare down 34% and Unipolsai lost 21%. Other fallers included Ericsson down 19%, Eutelsat down 40% on competition fears and Lufthansa declined 16%. On the plus side, Zodiac Aerospace was up 27%, Adidas gained 21% and RWE recovered 25%.
Asian equity markets were mixed with the Nikkei losing just over 3%, Hong Kong managed a 0.5% increase, whilst India was the strongest rising 6.5%. Risers included Hindalco Industries up 40%, Tata Motors up 26%, Toshiba rose 33% and Newcrest Mining was up 28%. On the decliners, Mitsubishi Motors lost 36%, Yokohama Rubber fell 27%, LG Chemical was down 23% and Japan Airlines dropped 17%.