From a market perspective we saw the FTSE 100 start at a level of 7,380 and close out the month some 10 points lower with an intra-month high of 7,430 which incidentally represents a new high water mark for the index in capital terms. This theme of suppressed volatility has been mentioned in previous monthly posts and again we find ourselves somewhat surprised that markets seem sanguine about pretty much everything that has been thrown at them- consider we have witnessed terror attacks domestically and in Europe, the apparent breakdown of Trump’s premiership in the US (more anon), ongoing uncertainty in Europe regarding domestic elections and the future of the union and finally the invocation of Article 50 in the UK. And that, really, is just for starters: April has already delivered a flare up of trouble in Syria and response from the US (although this will be covered in next month’s missive).
The question, therefore, is what is keeping equity markets as high as they are? Within the UK we can look at such indicators as rising inflation, reasonably robust economic data and weaker sterling promoting exports while assisting those that derive earnings in other currencies to construct a thesis justifying relatively high valuations, certainly when compared to fixed income where the UK 10 yr continues to yield around 1%. This in turn begs the question why Gilt investors are prepared to look through current UK inflation which would imply that the purchasing power of their investment is being eroded much faster than the coupon they are picking up in the meantime on the basis of UK inflation being 2.3%.
As mentioned previously it is notable that in the US we have perhaps seen Trump’s domestic programme start to unravel. Consider that his election platform relied heavily on the repeal of Obamacare freeing up enough capital to enable significant tax reform. This domestic economic policy agenda now seems dead in the water given the Republican failure to disband Obamacare and the tacit admission that the tax reform plan will have to be reconsidered. This throws into sharp relief the fact that US equity valuations remain at nose-bleed levels: from here the implied expectation is that economic growth will deliver earnings upgrades to justify valuations although it is increasingly difficult to identify a stimulus for that to happen and our cautiously positive outlook translates into a slightly underweight position from an asset allocation perspective.
Meanwhile the French election is growing increasingly fragmented as a 4th front runner has emerged in recent weeks. This has made the final outcome increasingly difficult to predict and hence margins for error have expanded. At this stage permit me to quote from the February monthly update: "A Marine Le Pen victory is outside the margin of error of current opinion polls although it would be brave/unwise to completely discount the possibility of her actually winning given recent experience". Don’t get me wrong- a Le Pen victory remains highly unlikely although the margin for error has broadened as a consequence of vote splitting which potentially favours her position. To reiterate we remain cautiously optimistic with regard European equity and have a moderately overweight allocation.
Finally from a thematic perspective we have continued to address overweight domestic cyclicals where appropriate while also undertaking a series of reviews to ensure that CGT and ISA allowances were utilised as appropriate. While this is a function that is fulfilled throughout the year in late March/early April we ensure that excess gains are mitigated through realisation of losses, cash is swept to ISAs where necessary or indeed holdings are sold and repurchased to utilise the subscription. On top of this we naturally get an elevated number of tax year end queries from clients and introducers.
Rowan Dartington Central Investment Team
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