The first week of June brought little that was new. Growth worries continued to dominate hand in hand with the eurozone debt crisis. Risk assets struggled whilst safe haven investments strengthened.
Equities were generally weak. Indeed the US and European markets have now declined for five consecutive weeks, as has the MSCI World. The Japanese market, sometimes favoured in uncertain times due to its lack of correlation, also declined as politicians indulged in another bout of tomfoolery.
There was a modest exception to this equity gloom: emerging markets managed a small gain, driven by Taiwan, Korea, India, Indonesia, Malaysia and Turkey rather than Brazil, Russia, China and South Africa. Although it is too early to act decisively we feel that this gradual outperformance by emerging markets may be the start of a trend.
Investors may start to feel that too much growth is better than too little and the fall in commodity prices will generally be helpful. Certain important constituents, for example China and India, are approaching the end of their tightening cycles. We intend to add cautiously to our exposure.
Every US economic data release in the past two weeks has disappointed relative to consensus expectations, particularly manufacturing PMI, which dropped to 53.5, lower than at the same point last year and long term US unemployment, which Friday’s report showed rose in May to 4% from 3.8%. This flurry of evidence of economic “softness” took its toll on US equities, with the S&P 500 closing at 1300 on Friday, down from 1363 at the end of April.
Whilst economic data, particularly US employment figures, have been disappointing, they have not been wholly unambiguous, with some signs that global growth may not be in the kind of jeopardy that the short term reaction of markets suggests. Japanese manufacturing PMI dropped well below 50 in the wake of the March earthquake and Tsunami, but has now started to rebound sharply.
With the major Japanese automakers offering more optimistic guidance on their production outlook. Supply chain disruptions which have adversely affected the rest of the world are now easing significantly. US jobless claims have also stopped increasing, though they remain above March levels. These improvements suggest that the negative data flow could stabilize in late June and July.
Investors must now consider whether we are entering a ‘soft patch’ or something more extended and more sinister. Commentators appear fairly evenly divided on this question. However, the further fall in 10 year bond yields last week indicated that there are clear concerns about the duration of this ‘soft patch’.
Among the positive signs that would trigger equity market rallies, would be a continuing ease in oil prices and evidence that Japanese supply chain disruptions really are mostly behind us.
Issued by: Rupert Caldecott, CIO of the Global Asset Allocation Team, Dalton Strategic Partnership LLP, an investment management boutique in London founded in 2003 by the late Andrew Dalton