Henk Potts' Market Review
Henk Potts – Barclays Global Investment Strategist
Henk Potts joined Barclays Bank in 1998 as a graduate and worked as a Stock Market Analyst for Barclays Stockbrokers, focusing on UK equities. In 2009, he was appointed Director of Global Research & Investments for Barclays Wealth and Investment Management, where he works as part of a team formulating and communicating investment strategy to internal and external clients.
Henk analyses a wide variety of asset classes, including equities, currencies and commodities, as well as ascertaining and explaining the effects of macroeconomic changes on financial markets.
Weekly Review – Monday 20 February
Henk discusses the stories that dominated the headlines and moved the market over the previous week’s trading and also highlights the key events that are likely to dominate during the course of the week ahead.
The below content has been taken from Henk’s weekly podcast. If you’d prefer to listen to this, you can do so via Stockbrokers TV.
What’s driving the stock market rally?
Well you’re right to say global stock markets did hit record highs once again last week. The S&P was up 1.2%. European shares were up 8/10ths of 1%. The FTSE here in London was up 6/10ths of 1%. If you look at the MSCI all country world index it’s generated four weeks of consecutive gains. I think earnings updates have been part of the reason why we’ve seen equity markets push higher. We’ve seen some good numbers on both sides of the Atlantic. More than half of the Euro STOXX 600 have reported results; 55% of which have beaten forecasts. If you look at the S&P 71% of companies reported results. FactSet data suggests 67% of companies have beaten earnings per share estimates; 52% have beaten in terms of sales.
Part of the gains of course can be attributed to the new Trump administration. I think it’s worth looking at the data on that. The S&P 500 a broad measure of US stock markets, the largest companies, is up 10½% since November election. If you look at the sector winners, really those that will benefit from a stronger economy, from less regulation, also the prospect of higher interest rates, so financials very much have been leading the way up 23%. Industrials are up 13½%. Materials have been doing well up 12%. Healthcare has been doing OK up 8%. A bit of a mixed picture there because there has been some suggestion the administration may try to reduce drug prices longer term. But of course there’s always President Trump now very much has to deliver on those promises in order for this to be fulfilled, but the underlying picture I think certainly for US equity markets remains a positive one.
What lies ahead for US interest rates?
Well Janet Yellen was given testimony to Congress last week, and investors certainly were looking for clues about the timing of the next rate hike in the United States. Given her remarks, she said the US Central Bank will likely need to raise interest rates at upcoming meetings, although she flagged considerable uncertainty over economic policy under the Trump administration. Then went on to say delaying rate increases could leave the policy committee behind the curve, forcing them to raise rates more quickly which could cause a recession – so a little bit of a warning coming through there.
I think the Fed is under real pressure. We’ve spoken about this before: growth is rising. We expect the US economy to grow at 2.2% during the course of this year against an underperforming 1.6% last year. Inflation has been pushed higher by food and fuel prices on a year-on-year basis – CPI hit 2½% in January compared to 2.1% in December – and labour markets of course are so much stronger. Unemployment has fallen from a peak in October 2009 of 10% down to 4.8%. Wages are rising, not dramatically but they have been rising up 2½% in January.
What does that mean? Well we expect two hikes during the course of this year: the first coming in the third quarter, the second I think coming in the fourth quarter of this year. And then look for two hikes next year. The risk is of course a steeper tightening path. If you look at market expectations the end of last week they were pricing a 34% chance of a hike coming through by March; 73% by June. So it certainly looks like policy normalisation will accelerate during the course of this year.
How has the eurozone been performing?
A little bit disappointing it has to be said: didn’t grow as fast as expected in the final quarter of last year. GDP for 19 countries sharing the euro grew at 0.4% in the last three months of 2016. That takes the annual pace down to 1.7%. Impacted by a reduced contribution from exports and industrial outputs, although there was a rise in the production of durable goods for consumers and domestic demand; slightly weaker growth path I think will reduce pressure on the European Central Bank to end its stimulus programme. It’s a reminder recovery within the eurozone still looks fragile. We expect eurozone growth to come in around 1.6% this year, so slightly weaker than we saw during the course of 2016.
What’s the outlook for UK inflation?
Headline year-on-year CPI inflation increases slightly less than expected, although still rose a solid 2/10ths of 1% from December last year as both energy and food prices drove the increases, although clothing prices were slightly cheaper. If you look at petrol prices, well they really have been rising over the course of the past six months due to the increase in sterling-denominated oil costs. We’ve also seen broad based reflation of processed food. In terms of UK inflation, we expect it to rise to 2.6% this year, but falling back to around 2% level as you look out to 2018. That allows the Bank of England I think to see through that temporary rise without having to raise interest rates. Remember economists are predicting UK interest rates will remain on hold for at least the next two years.
What’s the outlook for Greece?
Well it certainly feels like we’ve been here before: eurozone ministers meeting of course during the course of this week. While Greece is probably not on the brink of bankruptcy and default as it was a couple of years ago, given the bailout that’s been put in place, there are some concerns about Greece’s ability to hit these new financial targets that have been set for them, for them to receive their next tranche of bailout money. Athens as you can imagine continues to push back. They’ve been saying it will not impose one more euro of cuts on its austerity backed as a public, but international lenders have been demanding further savings: €3.6bn worth. That equates to around €8,600 per person.
Greece you should remember is still of course struggling. It’s drowning under that mountain of debt. It’s an economy that contracted in the fourth quarter. Unemployment is still up at elevated levels, still at around 25%. And pensions have been cut quite significantly by around about 11%. But what we should also remember is the context is incredibly important, the timeline is incredibly important. The electoral cycle in Europe of course taking place during the course of this year: elections in France and in Germany, and also potentially in Italy as well. You’ve got the backdrop of Brexit. Politicians are in no mood to relive another Greek tragedy playing out. So I think we will see some resolution. As always the can gets kicked down the road a little bit further, but there’s still as I say those fundamental issues.
I hope you’ve found this update interesting and I wish you every success for the trading week ahead.