GLOBAL EQUITY PERSPECTIVES 3 APRIL 2018

Transcription

1 GLOBAL EQUITY PERSPECTIVES 3 APRIL 2018 Kites rise highest against the wind not with it. 1. WEAK QUARTER Winston Churchill The past quarter was the first negative one for the S&P 500 index since the third quarter of 2015, though only marginally so. S&P 500 Quarterly Capital Return and Spread Between Earnings and Treasury Yields The above chart highlights the four periods of successive negative quarters over the past 37 years. Three of those (the years 1981, 2000 and 2007) logically started with negative returns in anticipation of imminent US recessions. We do not foresee one soon. The fourth instance (1983) occurred in an era of double digit interest rates (following an era of ultra high inflation) and relatively high valuations with the earnings yield 3% lower than ten year treasuries (see the bottom section of the chart). The current spread is 2% in favour of equities, compared to a long term average of 0%. On these bases we do not see reason for anticipating continued weakness. S&P 500 with 50 and 200 Day Moving Averages used as a guide to future performance.

2 Technically the S&P 500 has dropped to its 200 day support line. If it may drop through that level, it would not yet reflect a technical death cross until the 50 day average line crosses the 200 day line. It would need a further 5% drop for the 50 day average to trigger such an alarm. 2. ECONOMIC INDICATORS We follow many economic indicators. Our most trusted ones for the US are due to issue their monthly updates in two weeks time. The following off the beaten track ones provide useful information in the interim: US Chicago Fed National Activity Index vs S&P 500 The Chicago Fed s activity index has been quite effective historically to foresee upcoming US recessions, and therefore structural breaks in share prices. As reflected in the above chart, it shows that the US economy is performing above trend currently. US Philadelphia Fed Business Outlook Index vs S&P 500 Source: Bloomberg & Stonehage Fleming Investment Management Limited April Past performance should not be The Philadelphia Fed s business outlook index has also historically been quite effective in foreseeing upcoming US recessions, and the structural peaks in share prices. Although its reading is currently drifting lower off elevated levels, it is still twice the level reflecting imminent recessions and the structural peaks in share prices. 2

3 3. ECONOMIC ACTIVITY We would like to consider some of the key US economic activity series: US Consumption vs S&P 500 Consumption growth remains stable, both in nominal and real terms. This is obviously the main engine of US economic growth, and the main pillar for capital market support. US Tonnage of Good Transported vs S&P 500 The tonnage of goods transported is currently growing at 5% off an already high base. US Capital Expenditure of Non Financial Businesses 3

4 Capital expenditure is picking up off a low base. This has historically been seen as support for economic growth. Along with this, hotel occupancy at 66% is at a ten year high, and growing at 3% (on a percentage basis) and durable goods orders are growing in excess of 6%. Industrial production is growing in excess of 4%. It seems to us that the US economy remains in good shape. 4. WORLD TRADE World trade picked up materially from the beginning of last year and has been growing at around 5% since. This has clearly been supportive of world equity markets as reflected in the following chart: World Trade ($ Terms) vs MSCI World Index used as a guide to future performance. It seems that world trade data acts to some degree as a leading index for the world share price index, with quite a lead time. The US president s threats and first actions around trade wars are therefore unnerving many investors. US World Trade Data ($bn) The strong US economy causes a sharper increase in imports than in exports, with a doubledigit growth in its trade deficit with its absolute amounts approaching historic extremes. This may be some of the root cause for the US president s sharp reactions in this context. 4

5 China is the US s largest overall two way trading partner, but with a ratio of imports to exports of 4:1. This is clearly the issue Pres. Trump is concerned about, causing investors fears of an escalating trade war between the two nations and a potential disruption to the growing world trade that helps to oil the wheels of the global economy. 5. CHINA ECONOMY The weak US Dollar helps supporting the Renminbi, and therefore the stable Chinese foreign reserves can assist to support their economy. The currency volatility of 2016 is now less of a risk to their capital markets. Apart from this, their current economic data seems constructive: China Producer Price Index vs GDP (%) The PPI data has been strong through 2017, and although currently growing at a lower rate, still seems to reflect continuing good economic growth. On the basis of this chart we do not see reason to doubt the merits of the government s 6% GDP target. China GDP Component Growth (%) The most recent readings of the GDP growth components in the above chart all remain constructive. Particular notice of retail sales growth is warranted on an absolute basis it has been exceeding US retail sales on a monthly basis since November

6 6. EQUITY VALUATIONS We have shown in our previous note that equities are fairly valued on a number of valuation metrics. The following chart reflects the consensus absolute valuations of the S&P 500 companies: Consensus S&P 500 Company Valuation vs S&P 500 The consolidated valuation line reflects the 12 month forward target prices. They are currently 19% higher than the S&P 500 price index (see the second section in the above chart, the readings are 12 months advanced on the chart). The vertical lines reflect the timings when the target valuations historically were +19% or more than the valuations then, and furthermore the corresponding returns in the lower section of the chart. Apart from the readings during the recession, most of the timings reflected in the chart provided attractive returns a year later. Gerrit Smit Partner Head of Equity Management Stonehage Fleming Investment Management Limited 15 Suffolk Street London SW1Y 4HG T gerrit.smit@stonehagefleming.com 6

7 RISK DISCLOSURE This communication has been prepared for information only and is not intended for onward distribution. It is neither an offer to sell, nor a solicitation to buy, any investments or services. This communication does not constitute a personal recommendation and does not take into account the individual financial circumstances, needs or objectives of the recipients. The advice we provide will all be based on and take into account a majority of product types and not every single equivalent product within a given product category. As such, our advice is restricted (as opposed to independent) as defined by the Financial Conduct Authority. All investments risk the loss of capital. The value of investments may go down as well as up and, you may not receive back the full value of your initial investment. Past performance should not be Changes in the rates of exchange between currencies may cause the value of investments to go up or down in the reporting currency. In general, underlying investments denominated in foreign currency are not hedged back into the reporting currency. Among the factors that may influence currency values are trade balances, the levels of short term interest rates, differences in relative values of similar assets in different currencies, long term opportunities for investment and capital appreciation and political developments. Returns may increase or decrease as a result of currency fluctuations. Values may also be affected by developments relating to controls and restrictions on foreign currency remittance of proceeds of investments in a non sterling jurisdiction. Whilst every effort is made to ensure that the information provided to clients is accurate and up to date, some of the information may be rendered inaccurate by changes in applicable laws and regulations. For example, the levels and bases of taxation may change. Any reference to taxation relies upon information currently in force. You should note that the bases and rates of taxation may change at any time. Tax treatment depends upon the individual circumstances of each client and may be subject to change in the future. In addition to the information provided by Stonehage Fleming Investment Management Limited you may wish to consult an independent professional. It has been approved for distribution in South Africa and those countries of the EEA where distribution is permitted by: Stonehage Fleming Investment Management Limited 15 Suffolk Street London SW1Y 4HG Stonehage Fleming Investment Management Limited is authorised and regulated by the Financial Conduct Authority and registered with the Financial Services Board (South Africa) as a Financial Services Provider ( FSP ) under the Financial Advisory and Intermediary Services Act, No 37 of 2002 (FSP No: 46194). 7