Market update: Exceeding Expectations

Despite the lacklustre growth for the overall economy, UK equities have appeared as the winner month to date in both local and sterling terms, rising over 7%.

Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail   by Tertius Bonnin, 27th April 2018

After years of legal battle, the 9th US Circuit Court of Appeal judges have unanimously ruled that Naruto, a seven year old macaque, cannot sue for copyright. The case concludes a 7-year dispute in which a British wildlife photographer has sought financial control of the selfie taken by the monkey. PETA, the animal rights group, is appealing against the latest ruling.

Investors are also verging on unanimity with the probability of an interest rate rise by the Bank of England in May plummeting, resulting in a slide in sterling. Asset class returns in sterling and local currency are below, and for the second week in a row the fall in the pound has boosted the value of foreign asset classes in sterling terms.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

The plummet in probability for a May rate rise by the Bank of England was further accelerated by slower than expected economic activity in the first quarter of 2018. Preliminary GDP figures released on Friday showed expansion of just 0.1% in the year to March. A more detailed breakdown of the GDP composition is due later in the quarter though it is widely believed that both construction and retail spending were dampened by the recent cold weather – this cannot be attributed as the sole reason for slow down however. Implied probability for the rate rise stands at just 20%, down from over 80% less than a fortnight ago.

Despite the lacklustre growth for the overall economy, UK equities have appeared as the winner month to date in both local and sterling terms, rising over 7%. This has been spurred on particularly by the oil and gas sector, which has been a beneficiary of the recent moves in the oil price. Relative to other regional equity indices, the UK market has a particularly heavy weighting to energy and mining stocks. The latter has also been a beneficiary of a spike in commodity prices following the latest string of US sanctions imposed on Russian oligarchs and their business dealings.

Chart 1: Price return (excluding dividends) of UK oil majors versus the main UK market

Source: Bloomberg

Markets across the globe appear to be recovering from the mild correction which took place in the first quarter of the year. In the US, equity markets have been given a needed boost in the latest earnings season, as 80% of the companies in the S&P 500 that have now reported earnings per share (EPS) have beaten analysts’ forecasts. According to FactSet, this is the highest percentage of actual EPS figures above estimates since Q3 2008.

Several US technology behemoths are amongst those that have stunned investors by smashing through revenues and earnings estimates. Amazon, Netflix and Facebook have all seen significant uplifts to their share prices, with Amazon now comfortably sitting as the second largest company in the world by market cap. As of Friday, there was less than $100 billion between Apple and Amazon’s valuation! For shareholders in Facebook, this earnings beat will be a welcome break following the recent data breach allegations which has increased uncertainty around the future of regulation on the technology sector.

Chart 2: Price return of some major technology titans in the US versus the broader S&P 500 index

Source: Bloomberg

THE WEEK AHEAD: German inflation, US PCE inflation (Mon), US Manufacturing ISM (Tues), Eurozone unemployment, Q1 GDP (Weds), UK local elections, US Non-Manufacturing ISM (Thurs), US Non-farm payrolls and unemployment rate (Fri).

STAT OF THE WEEK: There was a 20% fall in the number of bottles of champagne sold in the UK in 2016-17 (Nielsen)

Data correct as at 27/04/2018.

About the author: Tertius Bonnin

Tertius joined EQ after succesfully completing a graduate internship in 2016. He supports our analysts and portfolio managers across a range of responsibilities whilst studying towards his investment analyst exams.
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