Fund Managers: John Husselbee & Paul Kim
Looming trade wars, interest rates and the ever-present Brexit situation dominated March, which proved another negative month for equity markets after a poor February. Over the month, the FTSE 100 dipped under the 7000 level for the first time since December 2016 and markets in the US, Europe and Asia were also in the red, with escalating trade concerns (and sterling strength an additional drag on the FTSE) pulling equities down.
Cutting through all the noise and daily controversies, two threads have dominated the Trump presidency – the reflation trade on one hand and protectionist rhetoric on the other. The latter simmered throughout last year, with comments from the Oval Office about the positives of dollar weakness raising concerns about a trade war, and the President recently stoked this smouldering fire.
Initial announcements focused on aluminium and steel imports but further details emerged over the month as the US published a list of around 1,300 Chinese exports that could be targeted for tariffs, amounting to $50 billion worth of goods.
Of course, there are two sides to any conflict and China came back with tit for tat plans to hit products including soya beans, fresh fruit, wine, pork, cars and recycled aluminium. This would cover a matching $50bn and it is hard to ignore the potential impact on Trump’s support base in the so-called ‘farmbelt’ states.
With his campaign rooted in the Make America Great Again message, this lurch into protectionism was bound to happen but it remains to be seen how far the US goes down this road if it risks harming the economy rather than boosting it.
Against this backdrop, the US was first off the interest rate blocks in 2018, with the 0.25% move to 1.75% being the sixth rise since December 2015. This latest increase was widely expected and priced in by markets, with the early reaction noting little evidence the bank is about to steer away from its stated policy of two more rises this year. New Fed chair Jerome Powell was clearly keen not to spook markets in his first month in charge, maintaining a fine balance between implementing a well-flagged rise and not appearing too aggressive.
Across the Atlantic, the UK’s Monetary Policy Committee voted seven to two not to raise rates in March, despite positive indicators including real wage growth moving into positive territory, solid retail sales and – at long last – some forward momentum on Brexit, with the UK and EU moving on to the trade negotiations. The chief negotiators, Michel Barnier and David Davis, said the deal on what the UK calls the implementation period was a decisive step in the Brexit process – although issues such as any potential Irish border remain outstanding.
Having stuck this month after warning of ‘faster and sooner’ rate rises back in February, a hike at the next MPC meeting in May looks fairly certain.
Elsewhere in the UK, we also saw a truncated Spring Statement from Chancellor Philip Hammond. We see three Ds – debt, deficits and demographics – as possible constraints on UK economic growth and the statement suggested progress on borrowing. The Chancellor announced the first sustained fall in debt in 17 years and said it should start declining as a share of GDP from 2019. The Government spends £50bn on debt interest annually more than on the police and armed forced combined – and we wait to see whether its ‘balanced approach to get debt falling’ will be successful in easing this brake on growth.
While the last couple of months have thrown up signs the global economy is perhaps not as strong as we thought, there is little indication of a recession ahead and therefore a full-blown bear market seems unlikely. If some of the questions I have highlighted are resolved, there is scope for the equity ascent to begin again but we could also see further corrections if markets have to process more disappointing data or there is a fresh dose of politically driven uncertainty.
Against this background, we continue to ignore the noise as far as possible and focus on fundamentals. As ever, our approach looks to top up favoured areas when they are cheap and we wait to see whether the current pullback offers any ‘buy on the dip’ opportunities.
Volatility also remains at elevated levels compared to recent lows and it remains to be seen what effect this has on the collective market psyche.