Macro Cocktail – Contrast in Equity Markets
Banque Transatlantique London Branch hosted its Macro Cocktail event at the Institute of Directors on Pall Mall. The third of a quarterly series of presentations, engaging clients and intermediaries on the state of play in markets and implications for investment strategy.
The audience heard first from the COO and deputy branch manager, Aurélie Diaz, who highlighted the branch’s wide range of services encompassing banking, financing and wealth management. Of particular note during the last quarter, was the launch of the discretionary investment management service and the roll-out of the mobile banking app to all clients.
Chief Investment Officer, Robert Jeffree, presented on the Macro environment, first contrasting the equity markets of 2017 and 2018. Last year, we saw relentlessly rising markets with low volatility. This year the trend is sideways with alternate risk-on and risk-off movements. Geopolitical tensions are creating uncertainty in the minds of investors. Many are flip-flopping in response to short term news flow on topics such as the ‘trade war’, Italian politics, Brexit, North Korea and the Iran nuclear deal.
Rather than chasing unpredictable short term movements in markets, taking a step back and focusing on medium to long-term trends can be more productive. In the US, we’re witnessing the end of a 37 year period of falling inflation, interest rates and bond yields. Value is appearing in bonds with yields becoming more attractive. For the first time since the financial crisis, the yield on relatively low risk US short dated bonds is approaching the dividend yield on the S&P 500.
Relative to last year, diversification and selective rather than broad market exposure has become more important. In the US, domestically focused consumer discretionary stocks should benefit from low unemployment and rising wages, while banks should benefit from the strong economy and rising rate environment. In emerging markets, country selection is key with Mexico and China much more exposed to trade with the US than, for example, India and Russia.
Of prime importance for asset selection will be the path of the US dollar. After a strong run driven by increasing interest rate expectations, a refocus by investors on the rising twin deficits (current account and budget deficit) could eventually bring downward pressure. This would provide relief for emerging market equities and bonds, support for commodity prices and gold but increased pressure on European exporters and the international revenues of the UK’s FTSE 100 companies.
The next Macro event will be held on 20 September 2018.