In v estm en t Views. July 2017

Transcription

1 In v estm en t Views July 2017

2 Global strategy Central bankers rise again It was supposed to be the year interest rate differentials between the US and other developed nations grew and rising US interest rates were meant to put a floor under the strong dollar. Certainly everyone agreed at the beginning of 2017 that the US Fed was going to continue on their path of increasing interest rates and they have not disappointed, raising rates at a measured, quarterly pace in both March and June. What markets hadn t bargained for, however, was that other Central Banks around the world might also start to think about normalising interest rates. It is early in the process, to be sure, but several developed market central bank Governors have begun to hint that the era of ultra-low or below zero interest rates may about to be curtailed. For now, stimulus and quantitative easing (QE) is still flooding the world with excess liquidity, central bank balance sheets remain bloated and markets remain complacent, but times may be changing more quickly than expected. The US has always been on the vanguard of the developed economies when it comes to the extraordinary stimulus project. They were the first sovereign to inject capital to its banking system, the first (aside from Japan) to get to the zero bound of interest rates, and the first to institute a large-scale QE program. Similarly, they have been the first central bank to begin to raise interest rates and recently have become the first to address the issue of tapering the reinvestment of their bond purchases, thereby (very) slowly shrinking the size of their balance sheet. Perhaps emboldened by the reaction to the US bond market to floating the idea of balance sheet reduction - the reaction was zero - other central banks are testing the waters, dipping a toe into the shark-infested waters of the bond vigilantes to gauge their reaction. It is fair to say that some toes may be missing. In Europe, Mario Draghi attempted to explain the evolving monetary policy stance of the ECB, but markets only listened to his relatively upbeat views on the economy, lower unemployment rates and reduced political uncertainty. The result was a strong move higher in the euro to put it 4% above the ECB s 2017 forecast and a near doubling of 10- year German government yields from 0.24% to 0.47% at the end

3 Global strategy Central bankers rise again (continued) of June. In Canada, Governor Poloz of the Bank of Canada sent an even stronger message that they are considering raising interest rates from the record low level that was instituted in the wake of the collapse in oil prices in This was a significant departure from a statement made only a month ago that uncertainties continue to cloud the global and Canadian outlooks. Short-term interest rate markets instantly doubled the probability of a hike in Canada, the 10 year Canadian government bond rose by 0.29% and the Canadian dollar rose substantially versus the USD. Lastly, Mark Carney of the Bank of England (BoE) echoed his committee voter sentiment (holding interest rates was only carried by a 5-3 vote in June) by signaling that UK base rates may have to rise in the coming months. His comments ran completely counter to his words of only a week prior and as with the European and Canadian markets, long-term interest rates rose and Sterling strengthened.

4 Equities Solid performance remains in place The second quarter was another strong one for global equities, with all major markets rising in local currency and US dollar terms. Over the last year it has been virtually impossible to write about equity markets without mentioning politics and last quarter was no exception. This time, the news came in the form of a market friendly outcome in France s April election. Many investors, including ourselves, have recognised that the Eurozone is going through a period of abovetrend economic growth, but saw the political risk as an impediment to increasing exposure to the region. With political risk now much reduced, it is tempting to move money out of the US and into Europe. However, we have seen a number of false dawns over the last few years and we would like to see better economic growth feed through to European company earnings in a meaningful way. We recognise that European equities are more direct beneficiaries of this recent period of global growth, but continue to favour the positive longterm characteristics found in Emerging Market equities and hence, prefer to hold this as the key regional overweight within our equity strategy. As mentioned above, the trend of a weaker dollar so far this year has kept global financial conditions favourable, particularly for Emerging Markets, which have returned 6.3% and outperformed Developed Markets by approximately 2%. Somewhat surprisingly, this outperformance has come against a backdrop of falling commodity prices. While those countries relying on commodity exports did not gain to the same degree, the many net commodity importers benefit from lower prices. Furthermore, companies in Developed Markets with high exposure to Emerging Markets have outperformed those with higher domestic sales exposure. This has confounded many analysts who had different expectations at the beginning of the year, but highlights the benefits of remaining well diversified rather than chasing the latest fashionable investment idea.

5 Equities Solid performance remains in place (continued) At the sector level, Health Care was the best performing sector, returning 6.9%, with Energy the weakest, recording a fall in the region of 5%. The Health Care sector underperformed last year due to worries surrounding potential legislative changes focused on drug pricing, but this year has seen a strong recovery. The political risks have changed in nature, but the market is placing a low probability that Congress will get the votes necessary to repeal The Affordable Care Act. However, this remains the clear risk to the sector. In the medium term, technological innovation continues to have significant potential to drive efficiencies and the more entrepreneurial thinking inside the White House knows that innovation is a key means of keeping costs under control and improving value for money. We remain overweight the Health Care sector, but continue to monitor the risks closely.

6 Fixed income Are global rates poised to increase? Fixed income markets in the US have eked out positive returns over the quarter as bond yields have ended the quarter lower than where they started, despite further monetary tightening from the Federal Reserve and signs from Central Banks in Europe and the UK that a change in policy direction may be near. After a pause in May, the Federal Reserve increased interest rates by a further twenty five basis points at the June meeting, in what was a largely expected move. Alongside the change in interest rates, the Fed also announced that they would be starting to unwind their quantitative easing (QE) programme. Initially, just $10 billion of Treasury and mortgage backed securities will be allowed to run-off monthly, although the pace will increase incrementally on a month-by-month basis until up to $50 billion of maturing bonds may not be re-invested each month. Despite the higher official rates and the requirement for the market to fill the hole created by the gradual wind-down of QE, the 10-year Treasury yield has trended lower over the quarter as a whole and is currently below 2.3%. Market expectations for further interest rate increases are clearly below the level indicated by the Federal Reserve s own forecasts. This appears to be driven by near-term inflation numbers which are weaker than anticipated, as lower oil prices and limited wage increases (despite near full employment) weigh on both demand and supply. In the UK, the BoE indicated that the first interest rate increase in a decade may be approaching. Minutes from the latest Monetary Policy Committee show that there was an increase in sentiment towards higher rates, with three of the eight person panel voting to unwind the rate reduction administered in the aftermath of last year s Brexit vote. We tend to believe that the thoughts towards higher rates in the UK are too early. In the first instance, the BoE have started to increase cyclical capital requirements for domestic lenders, which should ease unsustainable growth in domestic lending, a key concern for the Central Bank. In addition, a number of key indicators in the economy appear to be rolling over, pointing towards a weakening economy at the same time that Brexit negotiations from a newly weakened UK Government start to weigh on sentiment.

7 Fixed income Are global rates poised to increase? (continued) European bond markets bucked the general trend, with yields ending the quarter higher and returns muted. Hopes of a less fractured political backdrop in the wake of the elections in France, a more upbeat tone from the European Central Bank and steps towards resolving the Italian Banking crisis provided markets sufficient ammunition to remain in risk on mode at the expense of safer assets. However, emergency measures remain fully in place, as negative interest rates and QE continue to be administered. As with recent times, the divergence between what Central Banks are saying and doing versus where markets are priced means we prefer to remain underweight to the fixed income asset class and at present, maintain a lower interest rate risk than our benchmarks. We are comfortable with our exposure to credit risk, although we do remain conscious of tightening spreads. Where appropriate, inflation-linked bonds are held within portfolios, alongside fixed rate assets.

8 Disclaimer This document and the information contained herein has been prepared and issued by Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited and Butterfield Bank (Guernsey) Limited and is for illustrative purposes only. It neither constitutes investment advice nor is it an offer or an invitation to acquire or dispose of any securities and should not be relied upon as such. Prior to making any investment decision a financial adviser should be consulted. Products and services are available in the respective home jurisdictions and only in those other jurisdictions where they may be legally offered or obtained. The data source for this document is Bloomberg unless explicitly stated otherwise and is believed to be accurate as at the date of publication and may be subject to change without notice. Whilst every care has been taken in producing this commentary, neither the author nor Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited, nor Butterfield Bank (Guernsey) Limited shall be liable for any errors, misprints or misinterpretation of any of the matters set out in it. Past performance is not necessarily a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. In the case of some investments, you should be aware that there is no recognised market for them and that it may therefore be difficult for you to deal in them or to obtain reliable information about their value or the extent of the risks to which they are exposed. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. Before contemplating any transaction, you should consider whether you require financial advice. Any copying, duplication or reproduction of part or all of this commentary and/or its content in any form without the express written consent of the copyright owner is prohibited and will constitute an infringement of copyright unless expressly agreed to by Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited, or Butterfield Bank (Guernsey) Limited, or as otherwise permitted by the Copyright (Bailiwick of Guernsey) Ordinance You may not, without our express written permission, distribute or commercially exploit this work. This commentary and/or its content is copyright of Butterfield Asset Management, Butterfield Bank (Cayman) Limited and Butterfield Bank (Guernsey) Limited. All rights reserved. Butterfield Asset Management Limited is licensed to conduct investment business by the Bermuda Monetary Authority. Registered Office Address: 65 Front Street, Hamilton HM12, Bermuda. Telephone: +(441) Website: Butterfield Bank (Cayman) Limited is licensed to conduct securities investment business by the Cayman Islands Monetary Authority. Registered Office Address: Butterfield Place, 12 Albert Panton Street, George Town, Grand Cayman KY1-1107, Cayman Islands. Telephone: +(345) Website: Butterfield Bank (Guernsey) Limited is licensed by the Guernsey Financial Services Commission under the Banking Supervision (Bailiwick of Guernsey) Law, 1994, The Protection of Investors (Bailiwick of Guernsey) Law, 1987 and the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000, each as amended from time to time. Registered Office Address: Regency Court, Glategny Esplanade, St Peter Port, Guernsey, GY1 3AP. Company registered in Guernsey No Telephone: +44 (0) Fax: +44 (0) Website: Telephone calls are recorded for training, regulatory and security purposes. July 2017