Quarterly investment outlook. Five key issues shaping current investment strategy Third quarter 2016

Transcription

1 Quarterly investment outlook Five key issues shaping current investment strategy Third quarter 2016

2 Five key issues shaping current investment strategy Third quarter 2016 Page 2 Five key issues shaping current investment strategy 1. EU referendum The UK is open for business 3 2. Steady as she goes The US recovery remains on track 4 3. Caveat emptor The hidden exposure of index investing 5 4. Japan revisited Plenty of positives for Japanese equities 6 5. The changing face of globalisation Despite challenges, globalisation has not stalled 7

3 Five key issues shaping current investment strategy Third quarter 2016 Page 3 1. EU referendum The UK is open for business The vote to leave the EU is the most politically disruptive event for decades, but investors should consider the global context when assessing the implications for financial markets. Rathbones leading economic indicator of global growth 8% Rathbones' global leading economic indicator Global real GDP (year-on-year change in US dollars) Before the referendum, data suggested global growth would be decent for 2016 (figure 1). The outlook is softening in the UK, but will not affect global growth like a slowdown in China or the US would. The swift transfer of power from David Cameron to Theresa May was good news for the UK economy, avoiding a damaging period of uncertainty. 6% 4% 2% -2% -4% Figure 1 Macro data suggested decent global growth for 'Brexit' is likely to soften this pace, but it is important to remember the favourable starting point. We don t expect a prolonged recession, if at all, and continue to see plenty of opportunities in UK equities: the FTSE 100 is now an index of global companies and mid-cap equities have started to recover, but many still discount a recession (figure 2). Sterling has fallen dramatically, which has boosted exporters and companies with dollar earnings. The Bank of England s 0.25% base rate cut and QE package are welcome as is the guidance that it does not expect a deep recession. Mid-cap UK equities are being punished Rathbones' UK uncertainty index (left) +/- 1 standard deviation FTSE 250 market implied equity risk premium (right) % 8% 7% 6% 5% 4% 3% 2% 1% Figure 2 Domestically focused UK stocks are more sensitive to UK economic uncertainty. Source: Datasream, I/B/E/S, Rathbones

4 Five key issues shaping current investment strategy Third quarter 2016 Page 4 2. Steady as she goes The US recovery remains on track The Federal Reserve raised interest rates in December 2015 but has since left them unchanged (figure 3). Employment figures have been weak recently, adding to uncertainty about the economy. However, other measures of activity remain healthy, such as earnings expectations (figure 4). US equities had a mixed first half, but stock markets have been climbing steadily higher over recent months. Apart from the Black Monday crash in 1987, there has never been an equity bear market without an economic recession. The probability of a recession implied by leading economic indicators is very low. Following the UK s referendum, investors have shifted their attention to November s presidential election. While history suggests that election results have a limited impact, protectionism is a threat to global economic growth and a Trump victory would not be good for financial markets. Nonetheless, we remain positive on US equities. Interest rate expectations Fed funds rate 3-month futures (13/06/2016) 3-month futures (14/12/2015) 3-month futures (12/06/2015) Earnings expectations NFIB survey: % with jobs hard to fill, advanced 6m (left) Atlanta Fed's wage tracker (right) 4 6% 35% 5% 3 25% 4% 2 3% 15% 2% 1 5% 1% Figure 3 Markets expect US rates to rise gradually but uncertainty remains over when the central bank will make the next decision to hike. Figure 4 An increase in job vacancies is putting upward pressure on wages. Past performance should not be seen as an indication of future performance.

5 Five key issues shaping current investment strategy Third quarter 2016 Page 5 3. Caveat emptor The hidden exposure of index investing The country in which a company lists its shares is increasingly irrelevant from an investment perspective as many businesses operate globally. National stock market indices are misleading in terms of their geographical exposure. For example, FTSE 100 companies generate an average of 7 of their revenues from outside the UK (figure 5) and much of this is from outside Europe. In navigating this challenge, active management has an advantage over passive investment because stocks can be selected on merit rather than because they are in an index. Indices could be weak over the next few years as companies struggle in a lower-growth environment, yet there will be opportunities for active managers to generate attractive returns. Technological disruption will compound the risks of index investing as some companies will lose out to innovative newcomers (figure 6). Again, active management will have advantages, although clients will have to be open to increased tracking errors while these trends play out. Generating revenues at home and abroad Domestic Overseas FTSE 100 FTSE 250 Facebook, Amazon, Netflix and Google Share of S&P 500 market cap 6% 5% 4% 3% 2% 1% Figure 5 The largest UK-listed companies tend to generate a substantial proportion of their revenues from other countries. Figure 6 These four US technology firms have increased their market value relative to the S&P 500 Index substantially over the past decade.

6 Five key issues shaping current investment strategy Third quarter 2016 Page 6 4. Japan revisited Plenty of positives for Japanese equities Japanese equities have been testing investors patience over the last 12 months (figure 7). Is our overweight position still valid? Until prime minister Shinzo Abe s recent success in the upper house elections, global investors appeared unconvinced by the authorities grip on the economy (figure 8). The Bank of Japan s latest stimulus package was eagerly anticipated, but was only in line with expectations and suggested that the central bank may be running out of ideas. Nonetheless, we continue to see good value in Japanese equities, because of ongoing improvements in corporate governance and an asset allocation shift by domestic pension funds away from Japanese government bonds into stocks. We remain committed to Japanese equities even though they are unfashionable with many global investors. As active investors, we favour highergrowth domestic stocks with a commitment to improving corporate governance rather than the traditional export-driven behemoths. Japanese equities Nikkei 225 Index Japanese GDP (%) Q Q Q Q Q Q Figure 7 Japan s stock market has suffered a correction recently, leaving valuations looking more attractive. Source: Datatream, Rathbones Figure 8 Japan s economy has continued to expand this year despite some concerns about the government s ongoing ability to stimulate growth.

7 Five key issues shaping current investment strategy Third quarter 2016 Page 7 5. The changing face of globalisation Despite challenges, globalisation has not stalled Has globalisation stalled? Some commentators see the UK vote to leave the EU as another sign of this, given the bloc is based on the free movement of goods, services, capital and labour. Global trade 20 Annual growth in world trade volume, % Pre-crisis trend In addition, global trading volumes as a proportion of GDP have not changed since the 2008 financial crisis (figure 9), while nationalism and protectionism are on the rise (figure 10). Yet even before the financial crisis, some globalisation trends were slowing. They include international vertical specialisation, which enabled companies to reorganise their supply chains in the 1990s using cheaper emerging markets. In addition, rising incomes in emerging markets and sharp falls in the cost of technology have eroded the savings from outsourcing. Some companies in the developed world are reshoring their activities. We believe globalisation is changing rather than stalling. Knowledge-based capital has become more important, boosted by technological change and the internet the trade in services has overtaken its prefinancial crisis peak G20 trade measures (average per month) Trade-restrictive Trade-facilitating A B C A = Oct 14 - May 15 B = May 15 - Oct 15 C = Oct 15 - May 16 Figure 9 World trade volumes have not recovered to the pre-financial crisis long-term average. Figure 10 Trade-restrictive measures have overtaken trade-facilitating measures among G20 countries recently. Source: WTO Secretariat, Rathbones Past performance should not be seen as an indication of future performance.

8 Five key issues shaping current investment strategy Third quarter 2016 Page 8 Important information The value of investments and the income from them may go down as well as up and you may not get back your original investment. Past performance should not be seen as an indication of future performance. Changes in rates of exchange between currencies may cause the value of investments to decrease or increase. Information valid at date of presentation. Tax regimes, bases and reliefs may change in the future. Rathbone Brothers Plc is independently owned, is the sole shareholder in each of its subsidiary businesses and is listed on the London Stock Exchange. Issued and approved by Rathbone Investment Management Limited, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered office: Port of Liverpool Building, Pier Head, Liverpool, L3 1NW, Registered in England No Rathbones and Rathbone Greenbank Investments are a trading names of Rathbone Investment Management Limited. Rathbone Unit Trust Management Limited is authorised and regulated by the Financial Conduct Authority. Registered office: 1 Curzon Street, London W1J 5FB, Registered in England No Rathbone Trust Company Limited is authorised and regulated by the Solicitors Regulation Authority. Rathbone Investment Management International Limited is the registered business name of Rathbone Investment Management International Limited which is regulated by the Jersey Financial Services Commission. Registered Office: 26 Esplanade, St Helier, Jersey JE1 2RB. Company Registration No Rathbone Investment Management International Limited is not authorised or regulated by the Financial Conduct Authority or the Prudential Regulation Authority in the UK. Rathbone Investment Management International Limited is not subject to the provisions of the UK Financial Services and Markets Act 2000 and the Financial Services Act 2012; and, investors entering into investment agreements with Rathbone Investment Management International Limited will not have the protections afforded by that Act or the rules and regulations made under it, including the UK Financial Services Compensation Scheme. This document is not intended as an offer or solicitation for the purpose or sale of any financial instrument by Rathbone Investment Management International Limited. No part of this document may be reproduced in any manner without prior permission Rathbone Brothers Plc. All rights reserved.