Andrew Milligan, Head of Global Strategy at Standard Life Investments, talks you through the markets in the month that was May.
In this month’s market review I consider the continuing unpredictability in markets and what can be done to manage this. From political events and FTSE® all-time highs to changing oil prices and sustained levels of household debt, I take a closer look at what these factors could mean for the economy and markets.
Politics continues to cause unpredictability in markets
That said, it’s important to distinguish between one-off political events, such as the forthcoming UK general election, and deep seated political trends. Markets keep a sharp eye on elections, and you’ll often see them rise and fall in line with opinion polls. For example, although the markets initially assumed there would be a large Conservative majority on 8 June and performed strongly, as the polls have indicated a drop in support for the Conservatives, we’ve seen uncertainty creep in – hitting both the pound and UK stock markets.
It’s more difficult for markets to forecast correctly the full impact of other themes, especially complex ones like climate change or say geo-political developments in the South China Sea.
President Trump – can he deliver?
Views about the Trump Presidency continue to wax and wane and there are growing concerns over his ability to push through his proposed reforms. This in turn has resulted in investors changing their views about the future direction of US markets.
Initially there were major worries about Trump introducing possible trade barriers; this was followed by a period of greater confidence that sizeable tax cuts could boost the economy. However, over time, a middle path has appeared where the government is making changes, for example business de-regulation and developing new relationships with other countries, but is having difficulty pushing through a complex domestic agenda. Tax cuts are possible, but more for 2018 than 2017.
At Standard Life Investments we remain positive about US equities and believe the strong economy supports buoyant company profits. That being said we continue to monitor the political and monetary agendas closely to decide when all the good news has been priced in and it’s time to invest more heavily in other markets.
The FTSE® 100 hits another record high
With the FTSE® 100 once again hitting a record high, I’m frequently asked if this growth is sustainable.
The important thing to remember is that a very high proportion of FTSE® 100 earnings comes from overseas operations or exports, say related to oil or pharmaceutical companies, and so the level of the pound matters enormously.
Political worries in the UK have caused the currency to fall and so the value of the market has risen – the correlations are close at present. However despite this support, many large company stocks have under-performed their European counterparts as the UK economy hasn’t grown as strongly in recent months.
We can see signs of weaker consumer spending and rising cost pressures on many companies. On the other hand, many FTSE® 250 stocks (representing mid-sized companies) have done better, partly due to expectations of takeovers from overseas companies. We like global equity markets but are more neutral on the UK and prefer Europe and the US.
Household debt still high
The level of unsecured household debt in the UK is only slightly below what it was in 2007. This is a phenomenon we’re seeing in many countries. But the bigger issue is that household incomes haven’t grown much for the last decade or two, reflecting the fact that western economies are simply not as productive as they were in previous years.
Households borrow to smooth their spending over time, for example by credit card debt, or of course mortgages. Since the financial crisis, some households have tried to reduce their borrowings, and banks have certainly been more cautious about lending, but of course other households still choose to borrow, especially for car purchases.
The risk for the UK or any other country is that a sharp rise in unemployment or interest rates could make it difficult for many people to repay those debts and could cause quite a sharp slowdown in the economy. It’s an issue the Bank of England and other regulators are monitoring closely. Meanwhile some banks, for example in the US, have seen lower share prices as future loan growth looks set to be weaker and perhaps bad debts rise too.
Oil prices – higher or lower?
It may seem like the Organization of the Petroleum Exporting Countries (OPEC), such as Saudi Arabia, is trying to manipulate oil prices to push them higher. But it might be better to think about OPEC trying to prevent oil prices falling a long way.
Supply and demand changes quickly in the oil market – economic activity ebbs and flows, new low carbon technologies are becoming available, and of course the US shale industry produces more each year. As a result OPEC is very aware of the dangers of a collapse in oil prices, particularly when their member’s budgets are already under a lot of strain. For that reason an agreement was recently reached to cut back on oil production to try and keep the price above $50 a barrel. This is important as the energy sector is a large part of many stock markets.
Is it wise to sell in May and go away?
‘Sell in May and go away’ is a well-known trading maxim that warns investors to sell their stock in May to avoid a seasonal fall in equity markets. But is it a good idea? Only half the time! In some years it makes sense – if the market has got too far ahead of itself. In other years it doesn’t – if investors haven’t yet priced in all the good news.
There’s no denying there are seasonal biases in investing – for example history shows that the autumn can be a more dangerous time. But maybe the month of May should best be seen as an opportunity to examine your whole portfolio and make some careful tweaks should they be required.
If you have any questions about your investment strategy, your Financial Planner will be happy to help.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go up or down, and may be worth less than you paid in.