From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
This week’s note can be short and to the point.
Share-markets across the globe eased back as the week passed, with a few new and relevant cracks beginning to appear in what up until early February had been a wholeheartedly optimistic outlook.
China slowing in February
Firstly, Chinese manufacturing data for February surprised many and dropped to its lowest level in 18 months. Within the data, key sub-indices measuring sentiment on new orders, order backlogs and inventories all deteriorated.
The Chinese authorities have spent the better part of 6 months tinkering and tightening regulations around mortgage lending, wealth management investment products and their ilk, all with a view towards curbing excessive leverage. It would seem apparent that these efforts are now starting to bear fruit, and the economy is slowing down marginally from its strength early in 2017.
The pace of liquidity growth in China is already at historical lows (+8.6% annual growth) and tightening further, and certainly augurs for less economic optimism there during 2018 than we saw in the previous 12 months.
US flying, but concerns for Q2 emerging
Where the early look at China’s economy in February looks a little soft, the US remains buoyant. US manufacturing sentiment jumped to its highest level since 2003 and the prices paid component rose to its highest level since 2011.
US Consumer Confidence bolted to its highest since 2000!
The US economy is ripping for now, but the pull-forward of demand that is occurring from Trump’s $1tln tax stimulus leaves me beginning to fear for growth in 2019 and beyond.
Alongside this burst of US growth, fears of an inflationary spike through the second quarter of 2018 hold some concern for me too, particularly as it is set against the backdrop of Federal Reserve balance sheet tightening and liquidity removal.
An inflation surprise coupled with deteriorating supply / demand dynamics for US treasury issuance (Fed Reserve balance sheet tightening set against $500bn of new treasury issuance to pay for the tax cuts) makes me look a little more cautiously at asset markets as we head into Q2.
It is worth acknowledging that US inflation figures from May through to August last year averaged only +1.8% (less than the +2.1% for the full year 2017), meaning that the bar is set low for a surprise inflationary number during these months in 2018.
Trade wars emerging. Another concern
The unilateral decision taken by the Trump administration to impose 25% tariffs on imported steel and 10% tariffs on aluminum under the auspices of ‘national security’ is a big and bold move, and the mooted reason for US share-market weakness on Thursday night.
The move is the most aggressive anti-trade move by the US government in 30 years according to several reports and is hugely aggressive in nature. It seems inevitable that the Chinese government (first amongst many) will return fire in some way shape or form, and this move sets the world on faster course towards isolationism, higher costs and ultimately slower growth.
This move is populist in the extreme, but runs the risk of significantly impacting the cost structures of vital US industries such as automotive manufacturing, aerospace & defense and infrastructure, and in the medium term is unlikely to be anything but negative for global economic activity.
The week just gone – continued cash raising & defensive allocation
It was a busy week for us.
We have sold down Woolworths (WOW) and we have interest in the new L1 Capital Long Short fund (LSF), which we think will be a highly attractive addition to Australian equity portfolios.
When we add in the recommendation from earlier in February to reduce positions in other holdings, we have deliberately made a point of raising cash across Australian equity portfolios, as well as taking down exposures to positions where we felt upside was limited.
Our preferred corporate lending trust, the MCP Master Income Trust (MXT), announced a capital raising for almost $380m by way of an entitlement offer. You should receive details on this, at some point later today.
We have chosen to avoid committing more funds to this trust despite our confidence and comfort in the manager and the strategy, simply because we feel our investor base is already adequately positioned in this trust.
If you feel individually that you could or should raise your allocation, do please contact your advisor.
We continue to be minded towards a more conservative outlook.
The jolt in early February has really steeled us to be disciplined and patient, fully expecting that bout of volatility will again return as the year progresses. It will likely be bigger.
I had the good fortune of sitting in with one of the client meetings today, and this particular client quite rightly made the point that he was less able (and willing) to withstand ‘another GFC’ given his personal circumstances, and that some prudence might well serve him for the better in the months to come.
I happened to completely agree, and I thought this was particularly clever and pre-emptive.
We will send more out along these lines in the weeks to come, but would urge you to be in touch with your advisor to discuss your portfolio if this situation sounds like your own.
Enjoy the weekend.
Friday 12pm values
|S&P / ASX 200||5925||-57||-1.0%|
|Property Trust Index||1303||+3||+0.2%|
Thursday Closing Values
|U.S. S&P 500||2678||-25||-0.9%|
Key Dates: Australian Companies
|Mon 5th March||
|Tue 6th March||
Div Ex-Date – CBAPC, CBAPD, CBAPE, CBAPF, Downer (DOW), Medibank (MPL), Oil Search (OSH)
|Wed 7th March||
Div Ex-Date – Blackmores (BKL), Brambles (BXB), QANTAS (QAN), QUBE (QUB)
|Thu 8th March||
Div Ex-Date – BHP (BHP), QBE (QBE)
Div Pay Date – AGLHA, Dominos (DMP), MCP Master Income (MXT), WBCPD
|Fri 9th March||
Div Ex Date – ANZPG, ANZPH, NABPE
Div Pay Date – JB Hi Fi (JBH), Boral (BLD)
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.