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Smartim Weekly Market Review

16th November 2018
Smart Investment Management 
The week to date as at 12 p.m. Friday (GMT).

Markets and key events

Markets seesaw between US interest rate worries and hopes for a resolution in the US/China trade war

The MSCI World index fell 1.5% over the week, as markets sold off over continued concerns over US interest rate policy.  However, as the week wore on, markets responded positively to rumours that the US and China may strike a truce at the upcoming G20 meeting in respect of their trade war. 

As of 12pm London time, the US S&P 500 index is down 1.8%, the technology focused Nasdaq index is down 2.0%, EuroStoxx 600 index is down 2.0%, UK’s FTSE All Share is down 1.4%, Australia’s S&P/ASX 200 is down 3.2%, and the Japanese Topix is down 2.6%.  On the brighter side, the MSCI Emerging Markets index is up 0.5%, with the Chinese Shanghai Composite returning 3.1%.

Brexit

It was a volatile week for Sterling, as the currency rose to $1.3071 on Wednesday, following the announcement that the government had approved a Brexit deal.  However, any sense of harmony was short lived. By Thursday morning a number of cabinet ministers had resigned over the proposal, including the Brexit secretary, Dominic Raab.  In a mini repeat of the Brexit vote, Sterling reversed its gains, falling to a low for the day of $1.2726, whilst the FTSE 100 index inched higher.  The more domestically focused FTSE 250 fell 1.3% on the day. But, it was Ireland’s stock market that felt the most pain as the ISEQ, the Irish index, fell 3.8% on the day as investors worried that the Irish economy could be one of the biggest casualties from a ‘no deal’ Brexit.  As of 12pm on Friday, the pound is now trading at $1.2817 versus the dollar and €1.1332 versus the euro.

Crude oil

On Tuesday, crude oil slumped to $64.84, a fall of almost 25% from its near-term peak at the beginning of October, as a combination of weaker demand forecasts and reduced supply concerns have borne down on the price, despite the US sanctions introduced on Iran.  The price staged a small recovery towards the end of the week as reports emerged of OPEC (Organisation of the Petroleum Exporting Countries) and its partners considering an output cut.  Brent crude oil is now trading at $67.80 a barrel, whilst US WTI (West Texas Intermediate) is trading at $57.40.

Issues under discussion

Sterling

The apparent chaos of the UK’s tabled Brexit deal comes as little surprise, and arguably, as both ‘Leavers’ and ‘Remainers’ despise it, perhaps it is the ultimate compromise.  For all the threats to unseat the Prime Minister, Theresa May, whilst there is neither an obvious replacement nor an alternative plan, it may be that this is the best that we, the general public, can expect despite the deal delivering on few of the referendum promises.  It also brings no clarity to the future direction of sterling, which can have a significant impact on investment returns.  To manage this risk, we remain underweight sterling assets, choosing to hedge currency risk when we think it has become extreme.  In August, we hedged out a proportion of our US dollar and Euro exposure when the pound had sunk to $1.27 and €1.13 respectively.  Whilst we are back at those levels in short order, the portfolios still rise in value as Sterling depreciates, whilst dampening down the losses if the currency strengthens, and for the moment, we are making no changes to this stance.

Energy shares

We are also maintaining our exposure to energy equities, despite the sharp falls in the oil price.  The investment case for energy companies was that the dramatic collapse in the oil price that began in 2014, has precipitated a mindset change as company management’s focus is now on return on equity rather than capital expenditure.  The risk to this thesis was that rising oil prices would embolden company management to return to aggressive capital expenditure programmes, leading to a further dilution in profits.  The investment case still stands today, despite the oil price being the dominant impact on share prices in the short term.