Imperium Capital Publication

Viewpoint – July 2018

It was a flat month for developed equities and safe-haven government bonds, with the MSCI World index and US Treasuries returning zero in June. Notably, the market action came in emerging markets; where the MSCI Global Emerging Market equities declined 4.2%, EM bond yields fell by 1% and EM currencies came under pressure. Emerging market currencies vulnerable to a strong dollar and rising interest rates were put under considerable pressure. The Shanghai market fell by 8% in June, taking its fall from the peak in January into bear market territory, down over 20%.

Underlying these moves in the emerging market asset classes was a more hawkish tone from the Federal Reserve and escalating trade tensions. The Federal Reserve hiked rates by 0.25% in June which was widely expected by the market, following strong macroeconomic data. However, the Federal Reserve changed their forward guidance to include two additional rate rises in 2018 and then another three next year. If implemented this would take rates up from the current 2.0% to 3.25%, this would be the first time for a decade that US dollar cash would offer a positive real return.

Viewpoint – June 2018

The stand-out event during the month was the fall-out from the indecisive Italian election in March. An unlikely coalition of the anti-establishment Five Star movement and the far right League was finally able to form a government in May, only to have their nomination for Finance Minister overturned by the President on the grounds of the anti-euro views of the proposed minister and the perceived risk to stability. Investors, increasingly nervous about the populist, anti-euro views of the coalition parties and their policies of radical economic reform, took fright as it seemed the coalition would use this as an opportunity to push for another election, in which the populists could substantially increase their voting share, potentially increasing the risks of

Italy exiting the euro. Eventually a compromise was reached and, with a different finance minister, the coalition formed a new government. However, the damage to Italy’s bond markets and perceived credit worthiness was still apparent. With a government debt to GDP ratio of 130%, one of the highest in the world, Italy remains vulnerable, despite the better performance of its economy in the past year, while many Italians reject the budgetary constraints imposed by what is seen by some as an over reaching Brussels bureaucracy. The conundrum for the Eurozone remains; a single currency without full banking and fiscal unification is inherently unstable and prone to bouts of stress, leading to recent calls for reform.

Viewpoint – May 2018

While geopolitics dominated the headlines in April, it was economic factors that primarily drove markets during the month and underpinned the recovery in most risk assets after sharp falls in previous weeks. Developed market equities rose 1.1% while fixed income markets witnessed declines in credit spreads with gains in high yield bonds despite weakness in government bond markets. However, the most notable and important moves came in an acceleration in the recovery of the US Dollar and a rally in oil prices.

From its low point in mid-February, the US Dollar had already been recovering, but the trend accelerated in April with the Dollar rising by 2.1% on a trade-weighted basis. The trend has been supported by continuing optimism around the US economy, despite a relatively subdued Q1 GDP growth reading of 2.3% and increasing evidence of an upturn in inflation. In response to the uptick in inflation, the Federal Reserve appeared mildly dovish in its April meeting, indicating it was prepared to tolerate a period of overshoot in inflation above its 2.0% target, however investors are anticipating a further rate increase in June and another before year end. This pushed the yield on two-year Treasuries to 2.49% by month end, its highest level since mid-2008.

Viewpoint – April 2018

After a broad sell-off across many asset classes in February, volatility continued into March, with equity markets declining and government bonds rallying. Risk markets were impacted by the prospects of a US-China trade war with President Trump continuing to push his ‘America First’ philosophy. Emerging market and developed market equities fell, with emerging markets marginally outperforming. US equities fell 2.6% during the month, taking Q1 2018 returns to -0.9%. A key contributing factor seemed to be President Trump’s imposition of tariffs on imports of Chinese steel and aluminium and proposals for further tariffs on a wide range of goods.

China immediately responded, imposing tariffs on several US imports, including wine. This led to worldwide concerns of a potential trade war, which could have implications for global growth. In addition to this, tech stocks, among the strongest performers in 2017, suffered sharp share price declines. This followed a serious data breach at Facebook which led to a series of governments seeking to tighten the loose regulation of companies in the sector, while tax authorities are seeking to impose more effective taxes.