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Market Insights – August 20th, 2018

Weekly financial & economic analysis.

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Essentials

The latest figures from China still point to a gradual slowdown in growth. Economic activity fell short of expectations in July: industrial output was up 6.0% (versus 6.3% forecast) and retail sales rose 8.8% (versus 9.0%) year over year. This prompted the authorities to introduce a package of policies aimed at boosting growth and to make a temporary shift away from the country’s debt-reduction policy.

Despite the burgeoning crisis in Turkey, gold prices surprised everyone by dropping to a new recent low. Although its safe-haven status has failed to lift prices, investors are extremely bearish and short-selling is at very high levels. This suggests that gold could be could be close to a rebound. 

The political events of recent weeks have led investors to adopt a “risk-off” attitude and move into safe-haven investments, especially the US dollar. Renewed trade talks between the USA and China should calm the very bearish markets and could lead to some profit-taking on the greenback.

Very volatile forex markets!

comeback on the financial markets over the summer months. This is because there is less liquidity around, which can accentuate the impact of certain announcements or events. And 2018 is no exception. There has been no shortage of political announcements, mainly thanks to Donald Trump and his administration’s restlessness on the international stage. With its economic sanctions and import tariffs, the US government has launched a full-scale attack in the name of “America First” – and probably also to keep the USA at the top of the international political and economic pecking order. China and Europe were the first in Trump’s sights. But more recently, other countries – like Russia and especially Turkey – have come under fire from Uncle Sam. The political dispute between Washington and Ankara has escalated over the past few months. The recently announced US sanctions caused the Turkish lira to plunge, although it has recovered slightly in recent days. This has had a knock-on effect on a number of other emerging currencies, as investors feared contagion. We think this trend will be short-lived, as most emerging markets have solid economies and there is no reason for their currencies to be sharply devalued this year. Imbalances, such as large trade deficits and high levels of foreign-currency debt, still persist in a few countries. And Turkey is one of them – its diplomatic squabble with the USA only tipped the balance of an already unstable financial and economic situation. Some hard currencies have been boosted by this renewed aversion to risk. The usual safe havens – like the yen and the Swiss franc – have gained ground. The dollar has also been pushed up and does not yet appear to be troubled by the country’s trade and fiscal deficits. The euro hasn’t been so lucky – mainly because Turkey is not far away. The single currency dropped to below 1.13 against the Swiss franc after hitting the 1.20 threshold in the spring. We think the euro’s softness will be temporary, as the ECB is getting ready to normalise monetary policy. We are therefore increasing our exposure to the euro by 3% in portfolios with the franc as the base currency by unwinding all or part of the remaining currency hedges.

A brand new sector worth looking at

This coming autumn, the S&P 500 will undergo a major upheaval. Stocks in three sectors – including some of the largest caps on the index – will be affected by changes to the Global Industry Classification Standard structure. The Telecoms sector, which is currently the smallest sector in the index (2%) and made up of only three stocks, will be replaced by a new Communications Services bucket that will make up 10% of the index and be its fourth-largest segment. In addition to the Telecoms stocks, it will include companies for which advertising makes up a growing share of their revenues and which currently belong to the Information Technology and Consumer Discretionary segments. Internet stocks like Alphabet and Facebook are among the 20 or so companies concerned. Netflix, Disney and Comcast will also switch category.

Information Technology will continue to be the S&P 500’s largest segment, but its weighting will shrink by 6 percentage points. It will also be much more cyclical, with the increased prominence of firms that focus on semiconductors. At this late stage in the cycle, this will reduce the tech sector’s appeal.

However, even though we are not currently investing in telecoms, we will be bullish on the new Communications Services segment and are already recommending several of its stocks, like Disney, Facebook and Alphabet.

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