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Market Commentary - October 2018

25th October 2018

October 2018 - James Hambro and Partners

US President Donald Trump frequently touts a condensed version of Ronald Reagan’s campaign slogan, ‘Make America Great Again’, and often cites the current strength of both the US economy and stock market as vindicating his policy-making prowess. The S&P 500 equity index has just delivered its best quarterly return since the final quarter of 2013, rising by 8% in dollar terms, bolstered by surging company results, and is up by 10.5% in the current calendar year to the end of September. This strong performance is even more pronounced for a UK-based investor, boosted by a weaker pound. Even before Trump’s election, we had long regarded the US as representing the best fully-functioning developed economy, but the 2017 tax cuts and one-off repatriation of overseas earnings have accelerated the upward trajectory. Revisions to US corporate earnings have been stronger than the rest of the world’s, leading to a more optimistic view of the underlying American economy and re-enforcing a favourable outlook for the dollar.   
 
Politics has become a key determinant of investment returns. Aside from America, equity returns in 2018 have been fairly lacklustre, with Japan an exception. The Japanese market has returned 5% this year for a sterling based investor, but much of this was post Shinzo Abe’s re-election in September as the ruling Liberal Democratic party’s leader. The extension to Shinzo Abe’s term means he will be the longest ever serving Prime Minister of Japan and investors have welcomed the political stability and continuation of reform. Meanwhile, there have been negative returns this year from Asia Pacific excluding Japan and emerging markets that have borne the brunt of escalating trade wars and capital flight from countries overburdened by dollar debt. It has certainly become more expensive to service this debt, with the US Federal Reserve recently increasing interest rates for the eighth time this cycle, albeit only to 2.25%. 
 
Propping up the table of investment returns this year are Continental Europe and the UK, depressed by relatively weaker economies, corporate earnings and the continuing confusion around the Brexit end-game.
 
Maintaining focus on trade war rhetoric, China today is in far better shape to withstand pressure from the US than at any point in history, both militarily and economically. It has responded to recently imposed trade tariffs by a classic policy response of allowing a competitive currency depreciation and already exports twice as much to its immediate trading partners than it does to the US. For now, America may be satisfied with a moderation of its Asian rival’s growth, but it seems difficult to imagine any long term setback to China’s increasing ambitions on the geopolitical stage. 
 
Near-term, any increased rhetoric and retaliation could slow global growth, just as the Federal Reserve continues to hike interest rates and inflationary pressures gradually mount. These are not just a reflection of rude economic health and quickening wage growth, but also due to rising energy prices, with Iran and its oil supplies also firmly in Trump’s cross-hairs.

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