The silly season beckons
Investors should adopt a well-diversified investment strategy with some caution in relation to US and UK economic growth
Every now and then, stock market pundits refer to the ‘Silly Season’ when markets appear to be focussing on the frivolous and the irrelevant. It often occurs over the summer or around Christmas, when investors appear to be punch drunk with recent market intensity and almost suffer from crisis fatigue. I believe that we could well be encountering this market mind-set now. As far as markets are concerned, the business media moves on from one story to the next, which has the ability to produce the most sensationalist headlines, as that is what attracts readership. However, investors need to be careful they don’t get sucked into this and lurch from one event to the next, whilst ignoring what is really important with regard to the valuation of the assets they hold.
Just two weeks ago, it was all about the visiting Chinese Premier Xi Jinping and what would transpire from his summit with Trump in Florida. In the end this was such a non-event that the disappointment from the media delivered itself in such a way that the press conference failed to even register on many bulletins. Whilst on the surface this seemed like a complete market non-event, despite all the build-up and expectation, the read through from this was actually quite important in that Trump’s antagonistic pre-election anti-China rhetoric had clearly softened.
Following on from this, the pundits then latched onto the building confrontation with North Korea, where supposedly a US warship battlegroup was on its way to the Korean peninsula, which then delivered a confrontational response from North Korea. We then heard last week that in fact the Armada had initially sailed in the other direction – talk about Chinese Whispers! However, it is quite likely North Korea will try to antagonise the US with further nuclear tests and missile launches, which will again grab the headlines.
Perhaps Donald Trump is now learning that less is more when it comes to international public statements and tweets, which can very quickly backfire. He has certainly been tweeting a lot less in recent weeks and it would seem that US policy is increasingly being carried out confidentially within the Oval Office, which is of course how it should happen. In addition, it appears to be more aligned with what went before under the Obama administration, much of which was the only compromise available following years of negotiation.
So to the markets and the reality of what we invest in: namely companies, balance sheets, profits and dividends. It is true that the markets have performed strongly since February 2016, when Chinese economic growth was the crisis of the time, but it is very easy to get sucked into the argument that markets are expensive because they have rallied and set new highs. Over time, markets should set new highs as economies become bigger than they have ever been and as global growth expands. Similarly, they should correct if valuations get ahead of the economic reality in expectation of positive developments that then disappoint.
This is potentially where we are right now. Equity markets have driven ahead in expectation of the Trump reflation trade, which has dragged up global indices. However, to date, he has delivered very little and so he will be very focused on a Congressional positive outcome as his supporters and the markets are starting to get impatient.
Conversely, political concerns regarding Brexit and European electoral turmoil are starting to settle down, especially since the Dutch election result and now the French look like being relative non-events. In the case of France, it looks like the pollsters were fairly accurate and Macron will be victorious, which is a terrific sense of relief for nervous European investors. These were the two biggest issues worrying investors recently, a Trump upset and a European electoral firestorm, but both are looking like distractions as they play out.
Of far greater importance is the US reporting season, which really starts to motor this week and that will tell us more about the current state of the US economy and whether valuations have got ahead of themselves. We believe it is highly likely that at best they will support current valuations but not lead to upgrades, thereby supporting our modestly underweight stance. Of more interest on both valuations and growth potential are European and Emerging Markets, where the fear factor has been priced in, whether it is worries regarding Euro sustainability or Trump trade protectionist talk. Both of these issues seem to be subsiding with markets starting to realise, that regardless of Trump’s best intentions and tweets, there are sufficient checks and balances in place that he is being neutralised in Congress whenever White House policies rise to the surface that make little sense.
Of course, if Trump is going to fail to deliver very much, then we could well have seen much of the positive upside from US equities this year. Similarly, those areas that have been discounted are undervalued and that is precisely how we are positioned. It is important to follow this argument through which means that US interest rates will not rise as much as forecast as the economy will not be strong enough to cope with the unwinding of QE – both supportive developments. So whilst the best of the positive may not arrive, similarly the worst of the negative will also not be realised. That gives stability and suggests that any short-term negative volatility provides a buying opportunity and this ageing bull market has further to run, albeit a slow grind from here.
As for the UK election, it all appears very market friendly and, with hindsight, looks annoyingly predictable following Labour’s declaration that they would block any trade deal that was inferior to the current EU arrangements. It also diverts attention from Brexit negotiations until the MPs return from the summer recess in the autumn and Conference season finishes in early October, by which time we will know the outcome of the German election on 24th September. Theresa May should then be able to reveal her true colours without having to pay lip service to so many influencers whilst governing with such a slim majority. A broad, well-diversified investment strategy would be well-advised with perhaps some caution in relation to US and UK economic growth, with the former failing to reflate as much as hoped and the latter struggling from a consumer having to absorb price rises. Neither are earth-shattering developments, but these will serve to dampen excitement and lead to a dull period for markets.
Guy Stephens, technical investment director at Rowan Dartington