marketwatch · overview february 2017 marketwatch pricing spread: bid-bid • data frequency: daily...

The more positive view on equities for the year from a number of commentators is built on a more positive outlook for earnings rather than a simple re-rating.

Commodities are still strengthening, with oil prices on the rise after moderate coordination from OPEC and other oil producingnations, they should see their revenues stabilising.

There is little expectation that rates globally are headingto the kinds of levels that have caused problems foremerging market economies in the past. The US dollarhas strengthened but whether this is the start of anotherbig leg up is still in doubt. US dollar strength in the pasthas been a head wind for a number of emerging marketeconomies.

Emerging market recovery is neither in full swing nor curtailing. Caution is warranted whilst we wait for domestic demand recovery in a number of economies and some clarity around US policy going forward. However, valuations in a number ofemerging markets remain attractive.

Whilst this is probably one of the only summaries ofthe global market you will read this quarter that doesnot directly mention ‘the Donald’ and ‘Brexit’ we will beforced to shed light on these as we move to theindividual market sections as without doubt, they haveprofound implications from this point.

IMPORTANT NOTICE

Past performance is not necessarily a guide to the future andthe value of investments can go down as well as up. You mightnot get back the full amount invested particularly if anencashment is made in the early years. Economic andinvestment data sourced from JP Morgan, Invesco Perpetual, Henderson Investors, BlackRock, M&G and Standard Life Investments.This Quarterly Market Commentary is intended to provide a general view of global investment markets and its purpose is not torecommend or support any specific investment. The subsequent interpretation or application of the comment and otherstatistical information contained is not the responsibility of Churchill Investments PLC. If appropriate, professional advice should besought before giving consideration to any particular sector or market. Not all commercial property is regulated by the Financial Conduct Authority. Please note, unless otherwise stated, all charts are index levels over a 5 year period to date specified.

Churchill Investments plc is authorised and regulated by The Financial Conduct Authority

February 2017

Overview

MarketWatch

03/02/1985 - 03/02/2017 Data from FE 2017Pricing Spread: Bid-Bid • Data Frequency: Daily • Currency: Pounds Sterling

FTSE 100 TR in GB (46.73%)

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Index Total return in percent over

1m 3m 6m 1yr 3yr 5yr 10yr

Global High Yield Hedge GBP TR in GB 1.59 3.02 5.45 19.39 19.09 45.26 111.27

FTSE 100 TR in GB 0.19 6.40 10.18 28.13 24.30 46.73 65.41

FTSE EPRA/NAREIT UK TR in GB -1.79 1.58 -0.92 -4.67 16.01 78.05 -24.29

FTSE Eurofirst 300 TR in GB 1.21 6.81 12.72 30.99 30.15 65.25 75.14

Halifax Property(SA) TR in GB 2.26 3.78 4.70 26.60 38.25 17.33

Hang Seng TR in GB 2.17 1.64 14.48 48.38 53.60 69.25 150.56

IBOXX UK Sterling Corporate 10-15 Years TR in GB -0.37 -0.49 -2.01 10.37 25.29 51.58 71.69

IPD UK All Property TR in GB 0.81 1.40 0.74 36.39 56.10 44.00

MSCI Emerging Markets TR in GB 3.58 3.79 13.64 52.07 39.17 25.28 99.44

Nikkei 225 in GB 1.48 -0.13 12.95 34.77 52.24 84.39 82.89

S&P 500 in GB -0.41 9.53 13.12 40.13 72.22 115.79 149.63

UK Retail Price TR in GB 0.87 1.40 3.21 5.74 12.23 32.49

Source: Financial Express, 02 February 2016

OUTLOOK

UNITED KINGDOM

Having cautiously warned about the lack of positive earningsmomentum a number of times in our market comments, it ispleasing to be able to report for the first time in a number of yearsthat the UK market as a whole is enjoying positive earningsmomentum.

This has been driven by increasing commodity prices and the risein the US dollar. Thus for a wide swath of the market theirtranslated dollar denominated earnings are suddenly worth morewhen converted back into pounds in their company accounts.

Dollar earners and rising commodity prices should continue toprovide the market with earnings growth into 2017 but we wouldcaution that from here we believe much of this is now captured inthe earnings estimates and the forecast growth for earnings for 2018could be challenging.

At the moment a lot of domestic focused names in the UK arepriced for a recession, it is our view that it is too early to call suchthings and a recession is certainly not apparent in any of the dataat the moment.

Compared with the Eurozone the British economy has been doingrelatively well, thanks to gradual balance sheet repair in thehousehold and banking sector.

Up until now the 14% fall in trade weighted sterling has taken thebrunt of the Brexit hit. When formal negotiations start after March2017, we could see further falls.

Consumer spending supported strongly by increasing tourism hasbeen much stronger than a lot of the pre-Brexit predictions.However it is worth mentioning at this point that the long termpicture for this with a further fall in sterling and the spectre ofinflation is more unpredictable.

We currently face one of the hardest outlooks we have ever had to write for our quarterly commentary.

The improvement in global growth and the headline inflationary environment implies that we are probably past the maximum monetarypolicy impulse. The Fed will want to follow December’s rate hike with further increases in 2017, should economic data and marketconditions allow.

With the oil price now meaningfully higher than it was in January 2016 inflation is likely to pick up this year reducing global deflation fears.

The future of oil is an unpredictable one, whilst we have seen a cut in production from OPEC and non-OPEC producers, there is still alarge inventory and US Shale is once again coming back on line.

Gold will remain a hedge against increasing political risk this year although short term performance may be dampened by astrengthening US dollar.

Historically, interest rates have not de-railed the US equity market as long as the rate rise comes off a low base. In the past it has onlybeen one short term interest rate rise significantly higher than their current levels that equities have started to suffer from higher rates.

Meanwhile the ECB and Bank of Japan seem more interested in increasing sustainability ofexisting policies than adding significantly to new stimulus so whilst they are some waybehind the US and the UK, potentially they are turning in the right direction when it comesto normalising policy.

Obviously the huge elephant in the room is Donald Trump and as the world becomes usedto his presidency, there will be short term volatility in markets; let us just hope that by thetime we write our next quarterly review we are enjoying at least a few days per week wherehe is not the main focus of every news report.

GDP Growth Rate Annual Rate of Inflation 2017 2018 2017 2018

UK 1.4% 1.5% 2.9% 1.9%

Eurozone 1.2% 1.8% 1.3% 0.9%

US 1.9% 2.5% 2.0% 2.3%

Japan 1.4% 0.9% 0.8% 0.9%

World 2.8% 3.0% 2.4% 2.3%

Consensus Economic ForecastsSource: Schroders Feb 2017

The Bond market has already moved to price in two rate rises in the US for 2017 and equitiesresponded well to this move to higher interest rate expectations.

World Investment Scoreboard

Given the steep fall in sterling since the Brexit vote there is clear dangerthat if current rapid rates of money and credit growth are allowed tocontinue, domestically generated inflation will amplify imported inflationlater in 2017 and early 2018.

As banks have now completed much of their balance sheet repair workthey are no longer constrained by capital requirements and they havesprung back into life when it comes to lending. Even in what seems atthe face of it an uncertain future, lending growth has been strong as aresult of this.

The stress testing results announced by the Bank of England on the 30thNovember showed that while “some capital inadequacies were revealedfrom three banks (RBS, Barclays and Santander) these banks now haveplans in place to build future reserves”. Overall they concluded that thebanking system in aggregate is adequately capitalised.

FIXED INCOMEiBOXX UK Sterling Corporate 10-15 Years TR in GB (51.96%)

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iBOXX Sterling Corporate

The fourth quarter was a turbulent one for global Fixed Incomemarkets. Yields had started to drift up (and as such prices down)from the summer onwards especially after the Bank of Japanaltered its Bond buying programme.

Donald Trump’s victory accelerated the rise in yields as themarket viewed his policies as inflationary. Inflation is the enemyof Bond prices.

When growth expectations rise the opportunity cost for staying inan asset like Bonds which has no exposure to that growth rises andthe price investors are willing to pay falls, causing yields to rise.

Whilst it is perfectly plausible that we have now entered a difficultperiod for Bond investors as yields rise, the scale of a potentialincrease is the key question.

COMMERCIAL PROPERTY

In the UK the referendum fallout continues to affect liquidityand cause capital depreciation. Income remains attractive versusother asset classes although the risks are elevated shouldconditions turn recessionary or political uncertainty persist.

Core Europe still looks attractive in what is shaping up to be along low interest rate environment.

In the US it is difficult to predict exactly where we are goingfrom here under a Trump Presidency although fiscal expansionand infrastructure spending could help certain areas of theproperty market.

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FTSE EPRA/NAREIT UK TR in GB (78.05%)

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Barclays

Contact details

Churchill Investments plc,

9 Woodborough Road, Winscombe

North Somerset BS25 1AB

To arrange an appointment, or for advice, please contact us on

01934 844444

or Email: [email protected]

FTSE 100 Index

EUROPE JAPAN

UNITED STATES

FAR EAST & EMERGING MARKETS

Nikkei 225 in GB (84.39%)

Nikkei 225 Index

S&P 500 TR in GB (115.79%)

Hang Seng Index

S&P 500

MSCI Emerging Markets TR in GB (25.28%)

Hang Seng TR in GB (69.25%)

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FTSE Eurofirst 300 TR in GB (65.25%)

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-20%Feb’12 Jun Oct Feb’13 Jun Oct Feb’14 Jun Oct Feb’15 Jun Oct Feb’16 Jun Oct


FTSE Eurofirst 300

There has been encouraging signs of improvements in Japanesedata and the weaker Yen should provide a boost to corporateearnings in the short term.

In early December, much like other markets around the world, theJapanese market was driven forward by strong performance inbanks and insurance companies. This is due to investor sentimentaround higher bond yields helping these companies’ margins.This has continued somewhat into the New Year.

The outlook for Japan, in particular the sentiment of equityinvestors, remains somewhat dependent on expectations for the currency. In the immediate aftermath of the US election,currencies have moved to reflect widening interest ratedifferentials resulting in a weaker Yen and therefore improvedenthusiasm in Japanese markets.

However the risk remains that Japan’s perceived status as a safe haven currency could result in renewed Yen strength ifexpected developments from here lead global investors to a morerisk averse stance.

The recent trends with the currency and the upward trends in theoil price could act as a tail wind for helping lift the economy outof deflation in 2017.

Despite very low unemployment of just 3% and a tighteninglabour market reflected by the 1.40 ratio of applicants to jobs, wagegrowth remains sluggish, prompting the Prime Minister to urgecompanies to match their 2016 wage increases this year.

For most of 2016 growth momentum was shifting into the direction

of emerging markets after several years in which developed market

economies were in the lead. Time will tell whether faster US growth

swings the pendulum back but an expanding US economy could

help selective emerging markets.

Economic growth forecasts by a number of key economists have been

upgraded although the risk of short term volatility as Trump policies

get worked through and indeed understood, is a possibility.

The positive view of emerging markets has mainly been as a result

of an improving situation in China. It is expected that as much

stimulus as is necessary, mainly in the form of State spending, to keep

growth on target and provide President Xi with the political capital

he needs heading into the 19th National Party Congress.

Emerging markets continue to offer a valuation discount to their

developed market peers although as is always the case, short term

volatility must be expected.

At a country level, Italy performed very well in Q4 up 17.6% after

a rally that followed Matteo Renzi losing of the Constitutional

referendum. Much of the bad news and uncertainty was already

in the price. Despite the Q4 rally Italy remains the worse

performing country for the year at -6.5%. They were the only

declining market in Europe last year; France and Germany

performed well with returns of 8.9% and 6.9% respectively albeit

with all the returns coming in the fourth quarter.

A lot of the valuations in the Europe are at attractive levels and

if earnings can be delivered then the upside is quite substantial

from here. In the past we have seen a number of false dawns when

it comes to delivering this earnings growth; it is very easy to see a

scenario where political instability overrides valuation logic for

extended periods.

We are certainly not short of political instability in Europe. On the

4th December the Italian electorate decisively rejected the

proposals from Prime Minister Renzi to constitutional reform

leaving a political vacuum to be filled by yet another unelected

administration.

With controversial central right and central left governments in

Holland, France and Germany facing elections over the next year,

the rise of further disruptive political challenges is significant.

January’s European Central Bank meeting was most notably for a

dovish tone that Draghi struck when he stated that inflation would

need to be durable and self sustaining in the medium term before

the Central Bank will alter its accommodative policy stance.

With a cyclical upswing in full flow, most hard and soft datareleased in recent weeks suggests that companies and consumersalike are performing well going into 2017 but with politics stillparalysing the fiscal side of policy, any swift change in the directionof monetary policy at this point could very quickly put things intoreverse.

One area of concern is that even today major German and Italianbanks are struggling to meet minimum capital adequacy ratios,whilst the failure to inject adequate liquidity has meant normalspending across the eurozone is too slow for banks to repair theirbalance sheets through organic growth. This lack of growth is tooweak for government revenues to raise sufficient money to close thepersistent budget deficit and they are in danger of stagnating fromthis point.

The first is whether to work with Congress to aggressively loosen fiscal

policy. The second is how much of Obama’s domestic policy agenda

to dismantle. The third is whether to pursue an extremely protectionist

approach to trade policy, and finally he needs to decide how to put into

practice his desires to re-orientate US foreign policy.

Many investors will welcome a surge in growth after such a

disappointing recovery from the financial crisis. Nevertheless a fiscal

package along the lines discussed in the Trump rhetoric is not ideal for

a macro economic standpoint at this point in the cycle.

Given the long term budgetary challenges facing the US, permanent

income tax cuts that do not pay for themselves and mostly benefit the

fat cat higher income earners will worsen the fiscal position and provide

only a short term economic gain.

US equities have rallied strongly helped by improving economic

data and the hope of tax cuts and infrastructure spending from the

Trump administration.

Company profits in the US were falling for much of 2016 at the

headline level. However these numbers were massively skewed by

falling oil prices which have now turned and profits have followed.

Despite the higher quality nature of the US market, valuations

have become richer. The prospect of corporate tax cuts and

repatriation of overseas cash are likely to provide a substantial boost

to company earnings.

However, corporate earnings could be challenged by a stronger

US dollar and higher interest rates along with a squeeze on profit

margins from a pickup in wages.

Consumer confidence has now hit a post crisis high, the jobless

numbers are at very low levels which could be a key driver of this

confidence but it does of course have inflationary implications.

Inflationary pressures in the US are building. Only when inflation

gets out of control do equity prices begin to suffer. We do not see

out of control inflation at this stage but it is going to be higher than

what we have become used to since the crisis.

Looking back in history, one implication of a reflationary

environment with rising Bond yields has tended to be that financials

outperform stocks that are seen to be more cautious (dubbed “bond

proxy” stocks) such as consumer staples and utilities.

Pre-Trump the data was on an upward trajectory. There are four main

decisions that will determine whether President Trump’s first year in

office amplifies these pre-election trends or damages them altogether.

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Pricing Spread: Bid-Bid • Data Frequency: Daily • Currency: Pounds Sterling

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Pricing Spread: Bid-Bid • Data Frequency: Daily • Currency: Pounds Sterling 03/02/2012 - 03/02/2017 Data from FE 2017

03/02/2012 - 03/02/2017 Data from FE 2017

One of the areas that we have touched on a number of times in

previous MarketWatch’s and a region in which a number of our fund

managers have experience significant success is India

From the top down perspective India now looks slightly over valued

at an index level with a lot of good news now in the price. However,

there are still areas of opportunity. Banking is an area in emerging

markets where infrastructure is poor. In many emerging markets, the

sector is dominated by State owned banks where lending is often State

directed and service levels are poor.

India is no exception to this with approximately 70% of its banking sector

being State owned, however here the private banks are using mobile

banking to spearhead their drive to take market share.

Between December 2014 and 2015 the number of mobile banking

transactions in India grew from 16.8 million to 39.5 million, with the

value of transactions increasing from approximately 1.7 billion US

dollars to 7.3 billion US dollars, (according to the Reserve Bank of India).

Prime Minister Abe reaffirmed his commitment to the long standingpledge to eliminate the primary deficit by 2020. Judging by recentpublished fiscal projections this promise looks hollow. The gap seemsto be widening and assumptions in the administration forecasts toclose it are based around economic growth which can be viewed asextremely optimistic from here.

There are longer term themes to be considered as the US retracts fromthe international diplomacy stage and the role of Japan in Asia going forward from a military perspective has yet to be decided.However, these longer term themes are unlikely to have any shortterm impact on equity markets at the start of 2017.


Pricing Spread: Bid-Bid • Data Frequency: Daily • Currency: Pounds Sterling 03/02/2012 - 03/02/2017 Data from FE 2017

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