Economic & Political Roundup
A collation of recent insights on markets and economies taken from the comments made by chairmen and investment managers of investment companies – have a read and make your own minds up. Please remember that nothing in this note is designed to encourage you to buy or sell any of the companies mentioned.
Markets had their worst month of the year in May, as capital moved out of stocks and into government bonds. Renewed fears over the path and potential fallout from the escalating dispute between the US and China, over trade and technology, negatively impacted risk appetite. European stocks performed particularly poorly, sending the yield on the 10-year German Bund to its lowest ever level (pushing up prices).
|wdt_ID||Exchange Rate||31/05/19||Change on month %|
|1||GBP / USD||1.2629||(3.1)|
|2||USD / EUR||0.8954||+0.4|
|3||USD / JPY||108.29||(2.8)|
|4||USD / CHF||1.0006||(1.8)|
|5||USD / CNY||6.905||+2.5|
|wdt_ID||Indicator||31/05/19||Change on month %|
|3||US Tsy 10 yr yield||2.1246||(15.1)|
|4||UK Gilt 10 yr yield||0.886||(25.2)|
|5||Bund 10 yr yield||-0.204||(1800.0)|
Risks rising following early 2019 rally
Peter Spiller, and the rest of the management team at Capital Gearing Trust, believe the Fed’s decision to reverse course (stopping rate increases) removed a key catalyst that could have ended the current business cycle. The managers of JPMorgan Multi Asset identify the US as their most preferred and Europe their least preferred equity regions. William Barlow, CEO of Majedie Investments, makes the point that the 2019 market rally has not been accompanied by upward revisions to global growth forecasts.
Future no clearer as markets await leadership change
Mark Barnett, manager of Perpetual Income and Growth discusses the polarisation of UK equities between a basket of multi-national companies. which command high valuations, and a basket of domestic equities, which are valued significantly lower. Robert Talbut, chairman of Shires Income, states that a lack of confidence from businesses in the UK and in continental Europe is leading to disappointing investment levels. Judith MacKenzie, manager of Downing Strategic Micro-Cap, points to company-specific factors rather than Brexit or the general volatility in small-caps for the underperformance of their strategy while Thomas Moore, manager of Aberdeen Standard Equity Income, focuses on opportunities created by the widening divergence in valuation between defensive growth stocks and value/income stocks. Thomas also references how consumers appear to be taking Brexit uncertainty in their stride, helped by buoyant employment conditions, rising wage growth and improving household consumer cash flows.
Chinese lenders responding to fiscal stimuli while dividends across the region well supported by improving fundamentals and low payout ratios
Allan McKenzie, chairman of Edinburgh Dragon Trust, believes that while the late 2018 market weakness seemed overdone, the opposite has been true for the market’s recent rebound. Volatility seems a constant and he sees the US-China dispute being part of a larger and more complex tussle for geopolitical supremacy. The managers of Schroder Oriental Income discuss the significant shifts in China’s policy stance over the last few months; reserve requirement ratios have been cut and banks have been encouraged to lend more aggressively to businesses. They add that the sharp pick-up in total social financing in 2019 so far suggests that local financial institutions are responding to this guidance. While they also flag up many of the global risks that are abound, the managers also highlight low gearing levels by historic standards in the region and rising free cash generation; these forces present good conditions for dividends to surprise on the upside as pay-out ratios are in line with historic (modest) averages.
Japan expected to be a key beneficiary from the multiplier effect of China’s stimulatory measures
Christopher Samuel, chairman of JPMorgan Japanese Investment Trust, says China’s stimulus policy should help to support regional growth and lead to a recovery in global exports. Should growth pickup across the region, this would improve the outlook for the Japanese economy. Karen Brade, chairman of Aberdeen Japan Investment Trust, discusses the opportunities in the relatively under-researched small-cap area, where companies are demonstrating greater appreciation for the role good governance policies can play in attracting greater support from investors.
Biotech and healthcare
Reasons to believe M&A environment will remain buoyant
The managers of Polar Capital Global Healthcare take us through a market review of the past year, followed by a discussion on how technology is changing the way healthcare is being managed, delivered and paid for. Their outlook for M&A across the sector is discussed as well. To this end, they believe global healthcare remains highly fragmented, populated with strong balance sheets and stocked with management teams that are generally receptive to inorganic solutions to either complement internal assets or address portfolio shortfalls. Elsewhere, Andrew Joy, chairman of Biotech Growth, tells us that there is a sea-change taking place in the science underlying biotech, led by advances in gene technology.
Record exit environment good for realisations but makes sourcing new deals difficult
The market for private equity remains very active according to Hamish Mair, manager of BMO Private Equity Trust. Hamish tells us that many of their partners are noting record amounts of ‘incoming’ interest in their portfolio companies. On the flipside, finding attractive deals is very competitive with acquirers having to demonstrate a genuine ‘edge’ to win over vendors and management teams. Elsewhere, the manager of Electra Private Equity takes us through some of their key investments in the UK, including a commentary on the casual dining and shoe manufacturing sectors. Michael Bunbury, chairman of HarbourVest Global Private Equity, discusses the uncertain global climate and adds that significant quantities of capital are seeking deployment in the private company space.
Opportunistic capital waiting for clarity while logistics and industrials-based assets continue to outperform
We hear from the manager of Residential Secure Income REIT who discusses the market for specialised retirement living and the shortfalls they cater to. The managers of LXi REIT note how inflation has continued to outpace open market rent reviews and the spread has widened since the EU referendum result in June 2016. The industrials segment of UK real estate has been performing well; Neil Kirton, chairman of Warehouse REIT, expects this trend to continue through 2019/2020 and beyond. He says that demand for space is strong, with e-commerce continuing to grow and UK employment at record levels. Calum Bruce, manager of Ediston Property Investment Company, explains why the UK remains an attractive location for overseas investors who view it as a safe haven, but also a market where they can secure better yields when compared to the rest of Europe and the world. However, 2019 has started slowly, more so than in the first quarter of 2018. This lack of activity has been caused by investors adopting a ‘wait-and-see’ approach to deploying their capital, principally due to Brexit. The manager of Drum Income Plus REIT tell us that the political and economic issues facing the UK currently are having an impact on investor demand and therefore transactional levels for commercial property, as investors sit on cash awaiting greater certainty. On the topic of price falls, they say that one would expect that if prime yields have risen (price falls) by a certain amount, then secondary should have risen by more; so far there has not been evidence of this.
Record divergence in performance between weaker and stronger segments of European real estate
Hugh Seaborn, chairman of TR Property Investment Trust, says that the impact on the UK, and to a lesser extent continental Europe, inflicted by unprecedented levels of political uncertainty may well only become apparent in years to come. He adds that recent economic news has been weaker than anticipated and this has encouraged the European Central Bank to remain dovish towards the timing of the next interest rate increase. Market expectations for interest rate rises have therefore moved out to 2020. He says property companies’ ability to fix longer term debt at record low levels remains highly attractive and helps the predictability of earnings. Hugh also says that the divergence in performance between real estate sectors that offer the likelihood of rental growth against those that are less well placed has widened to record levels.
Deal flow and pipelines remain resilient while unlisted investors compete for high-quality assets in hunt for yield
On the subject of the political landscape in the UK, the manager of HICL Infrastructure Company says that cross border taxation is always on the agenda, with the prospect of a tightening in cross border taxation regulation remaining a risk. On the portfolio side, the manager’s report states that deal flow across target markets remains reasonable while the pipeline is healthy. The report also explains how there continues to be evidence of elevated pricing for high-quality assets, driven by strong demand from unlisted investors that are willing to accept a high proportion of returns derived from residual value (cash flows after the contracted revenue periods ends). Elsewhere, Ian Reeves CBE, chairman of UK-focused GCP Infrastructure Investments, tell us that the Brexit impact is expected to be greatest in the event of a hard, no-deal scenario, which may affect the cost and/or availability of European supply chains for infrastructure projects that rely on their ongoing operations and maintenance. Any negotiated arrangement is likely to have a limited impact on the company.
We have also included comments from Ecofin Global Utilities and Infrastructure and Pacific Alliance China Land.