22nd August 2017

Rathbones weekly review: Barbarian at the gates

It seems that the US president would be better off relocating his executive team to Trump Tower. The revolving doors of Donald Trump’s Midtown residence and business emporium would better accommodate the head-spinning changes in his staff.

The most recent cast-off is chief strategist and alt-right standard bearer Stephen Bannon. The much-maligned and sometimes-heard adviser was pushed out of the White House on Friday. “Bannon the Barbarian”, as he called himself, is returning to conservative news service Breitbart News to “crush the opposition”.

There is probably more bark than bite in Mr Bannon’s threats. And at least the man and his views are no longer present in the most world’s most powerful office. Mr Trump’s more recent hires are (relatively) more moderate and economically savvy.

Whether Mr Bannon’s departure means the end of Mr Trump’s pandering to the populist right is yet to be seen. Perhaps the fall-out from Mr Trump’s handling of last week’s protests in Charlottesville will hit home to the President. Perhaps it already has and the ejection of Mr Bannon is a reaction to that. It’s too late for the administration’s business councils though – one of the only real initiatives to come out of this White House. America’s captains of industry deserted Mr Trump in droves for how he handled the Charlottesville incident.

Word from Washington is that the long-awaited tax reform bill should be ready to debate by early next year. We are not the only ones who are sceptical.

Source: FE Analytics, data sterling total return to 18 August 

Hard to please

Last quarter, average US companies’ earnings were 10.2% higher than a year earlier. FactSet analysis shows that companies making most of their sales outside the US posted 14% bottom-line growth, compared with 8.5% for those with predominantly international revenue.

There are several reasons why this may be – one would be that the powerhouses of the S&P 500 posting strong bottom-line growth are the technology giants that are heavily exposed to the global economy. Also, the dollar has fallen almost 10% year to date, which should be boosting exporters as labour costs relative to overseas sales prices fall.

This was strong growth and should be encouraging, especially when coupled with the Michigan Consumer Confidence Survey jumping to a seven-month high in August. Unfortunately, worries about America’s ineffective White House and concern about weak wage growth for US consumers is weighing on the market’s mood. The latest Bank of America Merrill Lynch Global Fund Manager Survey found only a third of respondents believe company earnings will improve from here. At the beginning of the year, that number was 58%. Almost half the fund managers thought share markets were overvalued.

In short, investors are unmoved by strong corporate performance: shares in companies whose earnings outstripped forecasts actually fell[MB1] [HM2] [HM3] 0.3% during the period of two days before and two days after their results, according to FactSet’s research. Over the past five years, share prices typically rose 1.4% if a company outdid itself.

Not all risk markets are glum though. Commodities have been on a hot streak this year, and not just because they started at bargain prices. Global growth is expected to be 3.4% this year and 3.5% next year, helped by improvement in long-sluggish Europe and Japan. This decent demand has helped the outlook for raw materials – as has China’s efforts to reduce tremendous over-production. Copper has risen 17% so far this year, while zinc has also rallied. Prices for iron ore have picked up in the past few months too. Even aluminium, an industry that has been drowning for years in massive glut, has turned around. It is now selling for prices not seen in five years. These rapid rises are no doubt vulnerable to a slight correction. But it is great to see these industries starting to get a grip on supply/demand imbalances, and it is encouraging to see robust global demand being taken seriously by metals markets.

Finally, European Central Bank President Mario Draghi will speak at Jackson Hole, an annual monetary policy gathering in Wyoming. Mr Draghi is expected to drop some clues about the timing and strategy for reducing Europe’s extraordinary stimulus measures. The region’s benchmark interest rates are negative and the central bank is buying billions of euros’ worth of bonds each month. Cutting back these purchases without causing a panicked sell-off of debt and rapidly rising borrowing costs (as happened to the US in 2013) will take precision language and luck. If corporate borrowing rises too sharply, the nascent recovery in European growth may be strangled by its own good fortune.

Bonds

UK 10-Year yield @ 1.09%

US 10-Year yield @ 2.20%

Germany 10-Year yield @ 0.42%

Italy 10-Year yield @ 2.03%

Spain 10-Year yield @ 1.44%

Julian Chillingworth
Chief Investment Officer

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