This morning, in early trade, futures are predominantly green which will be a relief to investors after Friday’s disappointing NFP stats.
It is nearly a year ago when U.S. equity markets commenced a decline which, in 3 to 4 months, wiped US$5 trillion off U.S. market capitalization and sent worldwide equity markets into decline. I remember that there were big declines in U.S. equity prices on 07.10.18 after a weak September. The nadir in U.S. equity prices was on or about 24.12.18. It was a few days later elsewhere.
The main reason for that downturn in the U.S. was doubt about earnings.
- Equity prices had rocketed when tax cuts sent hopes soaring.
- This resulted in P/E ratios and other measures of strength shooting much higher than company earnings warranted.
- The fears were partly valid but, as often occurs, they were exaggerated.
- Other causes of the decline were the trade war with China, tariffs and economic growth fears.
This year, there are similarities with 2018 as U.S. equity indices are approaching new all-time highs, economic growth has declined (even the Fed has had to cut interest rates), the trade war is worse than in 2018, manufacturing is depressed and worldwide growth rates have declined.
As last year, a bright spot in the U.S. economy has been employment. Plentiful jobs are still being created but they are not feeding through into higher GDP growth (GDP growth has declined since the tax cuts in Q1/18 but it’s nowhere near a recession). The unemployment rate remains low at 3.7% and retail spending is holding up (which is why the U.S. continues to have large balance of trade deficits).
Having set out the background, what do I expect in markets this coming week which ends with Friday 13th?
- Equity indices – after a bad August, the recent rebound has pushed equity indices and good equity fund prices towards annual highs. I am not saying that they won’t go higher buts there are no basement bargains.
- Chinese equity indices have quietly been logging up gains.
- The SHC passed the 3,000 point milestone headed higher.
- The SZC and CSI300 were the best performing equity indices last week (ignoring the erratic MERVAL and Argentine peso).
- Chinese indices are approaching 12 month highs which last occurred in 04/19.
- On Friday, China eased bank reserve requirements which freed up US$126bn for investments in infrastructure and other developments.
- US trade war advocates claim that the recent import/export stats show the economy is weakening:
- exports should not be viewed on a MoM basis but on trends based upon a 3 month rolling average;
- exports to the US were not significantly lower, the declines were with other trading partners whose economies are weakening;
- imports are down – one of the reasons was cancellation of US orders for farm produce.
- China has many more interests than just US import tariffs. It has huge development programmes, it trades worldwide, usually with a surplus, it has developed its own technology giants and its has many entrepreneurs.
- China equity fund prices are approaching yearly highs but the risks of a Trump eruption are high. If you’ve not already bought, I’d forego Chinese equity funds. Ditto ETFs.
- HK – I am avoiding any HK investments whilst riots persist. They flared again this weekend.
- Other Asia – the SET has begun a rebound. My favourite fund is JFTHAII.
- EEC – the ECB meets this coming week.
- If the stimulus package does not meet market expectations, then the recent rally is likely to reverse.
- Draghi has surprised before on stimulus – will he do it again and side with the hawks?
- EEC equity indices are approaching 12 month highs and so too are many equity fund prices.
- A small investment in good EEC equity funds seems relatively risk free. I like JGAPEOL, ABEEMAA, FSEQFTI and RCMEATU.
- U.S. – I expect a lot of speculation about what the Fed will do at its next meeting on 17 and 18.09.19.
- Markets are likely to swing with sentiments.
- Trump is likely to be tweeting his criticisms of the Fed with increasing ferocity as the meeting date approaches.
- There’ll be no more clues from the Fed re interest rate cuts as it’s entered its “quiet period” before a meeting.
- I think the impetus generated by the promise of trade talks has been priced into stocks.
- Kudlow’s words on Friday certainly did not improve investor hopes of a trade agreement or investor sentiment.
- I think that U.S. equity markets will meander along over the week unless Trump erupts again.
- U.S. equity funds with good historic price performance stats usually gain in the long run. I like tech funds FLEUSTI and MERTEPI (has improved of late), large cap fund WFUSLCA and healthcare fund VARI3US.
- Bond funds – some bond funds perform inversely to equity funds. In the long run bond funds are not good investment but there are some exceptions to the generality. It is worth having a few bond funds in a portfolio. They may not gain as much as equity funds but if they decline, the losses tend to be less than the losses for equity funds.
- Cash in the bank – interest rates are paltry and likely to decline or even become negative. Inflation erodes buying power of cash so bank deposits are not a good investment. The public has politicians and central bankers to blame for this poor situation.
- Property is a long-term investment with high expenses.
- sterling – markets do not like Brexit so if it fails, or if there is a concessionary deal, sterling will bounce higher. If there is an election – who knows?
- euro – depends upon what the ECB decide. I foresee further declines for the euro as that is the trading reaction to ECB interest rate cuts and QE.
- US$ – recent weakness is likely to be short-lived.
- yuan – Friday’s gain was due to China easing bank reserve ratios. I doubt it will last.
I have complained a few times about ETF and equity fund prices not matching equity index movements. On Friday I was surprised when the prices of my 2 US tech fund investments gained when the high tech sub-index fell. I checked the prices of the top 10 equities in each fund and they were, on average, red. Makes one wonder how well equity fund prices are assessed?
In a largely unreported decision, last week, the IMF found that there was no evidence to support the White House’s allegation that Beijing was a currency manipulator. Dissatisfied with the verdict, the White House (Mnuchin) is applying pressure on the IMF to change its verdict. According to a report, Mnuchin refers to a 1980 law re currency manipulation but that law was updated in 2015 with a more detailed definition of currency speculation and the actions that a manipulator must have made to fall foul of the law. Who is the largest financial contributor to the IMF? The U.S. of course.