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Diverging paths

04 July 2018

Strong corporate earnings and trade tussles pushed major indices in different directions, reports CIO Chris Ralph.

Love him or loathe him, the US President is hard to ignore. Indeed, the words and actions of Donald Trump could be seen creating ripple effects around the world over the second quarter, not least on markets.

Corporate earnings in the US delivered some eye-watering figures, as company profits rose at their fastest quarterly rate since 2011. Apple, the world’s largest company by market share, reported a first-quarter sales rise of 31%.1 Amazon also prospered, and has now roughly doubled in value since Donald Trump took office.

Yet technology only accounted for some of the broader boom in corporate earnings. The package of tax cuts and repatriation deals provided by the White House’s new bill late last year supplied much of the rest, aiding profitability across several sectors. Banks and oil majors both showed strong signs of growth too, aided by improved balance sheets, rising interest rates, and a higher oil price.

In April, the current global economic expansion and market bull run entered its tenth year; in June, the US’s own growth run became the second-longest since its records began, 164 years ago.2 One respected forecaster estimated second-quarter growth at a meteoric 5.3% annualised.

The S&P 500 rose some 3% over the quarter, although this also reflected its recovery from February’s correction. Despite the rise, it is significantly less expensive relative to earnings than at the start of the year. Among the stocks to win attention over the period was Walmart, which announced it would pay $16 billion for a 77% stake in India’s Flipkart, the largest foreign direct investment in India’s history.3 Another was 21st Century Fox, as it sought to secure Sky and fend off a rival bid by Comcast.

The accompanying measures for an economy that is growing healthily are increasingly in place too. Quantitative easing in the US continued to be wound down, while interest rates continued to rise - there was a further 0.25% hike in June, the second of what is forecast to be four such rises this year.4 10-year Treasury yields, meanwhile, rose above 3% for the first time in years, reflecting in part the growing willingness of the Fed to return to normal monetary policy - that return is a sign of confidence.

If politics provided a boost for some US stocks, its impact was less benign elsewhere. The US President cancelled the Iran deal, agreed to sanctions on Russia, continued to ratchet up the trade spat with China, refused to sign the broadly globalist communique agreed at the G7 gathering in Canada, threatened further measures against Mexico and Canada, and ended June complaining that the EU was “almost as bad” as China on unfair trade practices.

As David Millar of Invesco Perpetual recently put it: “Two years ago, central bankers were the most powerful people in the world - now the politicians are back in charge.”

Political frictions were widely felt in emerging markets over the quarter. Russia, target of sanctions for the poisoning of Sergei Skripal in Salisbury, saw its leading index fall 11% in a day. Mainland China’s chief index entered official bear territory on trade tariff fears. Indeed, emerging markets more broadly stuttered through the period not simply on trade tariffs; some also suffered from the high price of oil and from a rising dollar (which makes dollar debts more expensive).

Sentiment in much of the developed world was more positive; stocks in both the eurozone and Japan performed well, boosted by the higher dollar as well as by corporate earnings. Nevertheless, expectations were being pared back by quarter-end, on mixed business confidence in Japan and disappointing first-quarter growth figures for the eurozone. The European Central Bank showed some confidence in scheduling the end of its bond-buying programme, but was cautious on the prospects for interest rate rises.

The period closed with a perilous meeting of the European Council in Brussels. A new populist coalition in Italy, agreed earlier in the quarter, highlighted EU divisions over both immigration and budgetary rules. Nevertheless, France and Germany sketched out the contours of a possible eurozone budget – a potentially significant shift for the eurozone.

Brexit developments continued – but not apace. Theresa May managed to squeeze her EU withdrawal bill through parliament before facing criticism from her Cabinet for compromises and from the EU for vacillating. The UK clocked its fifth successive quarter of growth below the eurozone average while, in April, retail sales suffered their worst monthly decline since 1995.5 Yet as sterling struggled, the FTSE 100 posted its strongest quarterly performance in five years. Perhaps more miraculously still, at time of writing, England was still a contender in the World Cup.


Source: FTSE International Limited ("FTSE") © FTSE 2016. "FTSE ®" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any libaility for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

© S&P Dow Jones LLC 20[16]. All rights reserved.

Invesco Perpetual is a fund manager for St. James's Place.

1 Bloomberg, accessed 4 July 2018
2 National Bureau of Economic Research, 
accessed 4 July 2018
Bloomberg, accessed 4 July 2018
Bloomberg, accessed 4 July 2018
5 Bloomberg, accessed 4 July 2018


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