It would now seem that around every market corner, lurks the latest portmanteau (you may have to look this one up folks) creation – the recent favourite being - Brexit! In house, we felt that craptacular, gaydar, even Brangelina were more poignant but what do we know. With markets in an obvious holding pattern over the last two months and the U.S. Federal Reserve rate hike plan looking more like a bad pantomime with each passing week, money market talking heads were obviously running out of fodder. With Grexit meekly exciting stage left last year, the scene seems to be set for the latest instalment of the Eurogeddon soap opera!
After a roller coaster ride at the top end of the range, American equity markets (as measured by the S&P 500 and Dow Jones indices) finished a little over flat for the two months ending in May. US small caps, hardest hit over the last year, provided the brightest spot by rallying over 3% during this period. European large caps notched a similar return but remain entrenched in a firm downtrend from a June 2014 peak. Asia went down a little over April and May, is up a bit for the year, but still well off its 2015 high. It is probably worth mentioning that Africa, a region that does not get much press (financially) on our side of the world, is up a whopping 12% for the year. Unfortunately (and you knew this was coming) we’d have to put that in context against a craptacular (in keeping with the theme) drop of more than 40% over the last two years. Still, a rebound like this is worth anyone’s watch list.
The ASX 200 finally had its day in the 2 month sun as it powered up more than 7.5% and finally dropped its obsession with the 5000 point mark like a bad date! Of course it isn’t just coincidence that the rise in (resource heavy) Aussie equities was matched by an equivalent (and then some) uptick in general commodity prices during this same period. It also wasn’t an accident this rise commodities coincided with China mom and pops (burnt by government clampdowns in the equity markets) finding a new casino - commodity futures - to yet again gamble away their savings. The liberation of China’s commodity trading and the ensuing feverish excitement of having another avenue to take a punt led to surge in prices of iron ore, steel, even eggs! All against a still ominous background of commodity oversupply. If the implosion of their stock markets were anything to go by, no prizes for guessing how this gamble will play out. Persistent Chinese capital outflow also continues to look for newer “homes” (literally). A simple look at the property REITs index revealed a 6 times outpacing of the ASX 200 benchmark return, year to date! Full props to new homebuyers of course, lest we forget.
The Aussie dollar, never a fan of interest rate cuts, got pummelled for 6% and most of that in May alone. Now we did tell you to do all your online overseas shopping last time!
The Brexit apparently. With a US rate rise assuredly off the table thanks to continued dovish fretting by the Federal Reserve, a more than confirmed China slowdown and markets range bound over the last couple of months, all eyes will be on the British citizens’ referendum to leave the European Union on June 23rd. With market volumes visibly thin on this recent run up and the usual fearmongering that gets bandied about should a nation attempt to do what’s in its best interest (this seems to be an ongoing issue in Europe?), a result that gets too close to call will certainly have the potential to roil markets - even before judgement day. A sterling that gets Pounded (couldn’t resist there), a hit to U.K. GDP and spending, chaos in credit spreads, a EUROxodus (we came up with that one) and other serious knock-on effects on peripheral and global markets have all been bandied about. As we’ve seen from events in August 2015 and earlier this year, any market unravelling can come in fast and furious.
Private Wealth’s continued insistence on only high quality investments and the overarching defensive slant that we’ve incorporated in our portfolio positioning for some time now, should hopefully give us the protection needed to weather the latest potential storm.
Britain’s possible Exit from the European Union. To summarise this simmering and obviously thorny issue (for the Brits and world markets), let’s hear concisely from both camps:
• Open season on the UK (via looser border protection) means it has no immigration control over other EU member states. Abuses of the UK’s generous welfare and NHS (medical) schemes and potential terrorists waltzing through are a common, resulting cry.
• An EU membership fee is akin to the most expensive country club on the planet (that doesn’t exist)! LEAVERs would prefer this money be spent on local industries and scientific research.
• Britain can independently pursue international trade deals with China, India and the US without seeking permission from daddy EU.
• A trillion pounds of foreign direct investment, half of it EU-related and thus justifying the platinum membership fee.
• EU mandated workers’ rights – regulated working hours, guaranteed leave allowances, anti-discrimination laws – which could potentially be lost
• The loss of strict and highly beneficial food standards, health laws and animal rights.
• Jobs and travel – an estimated three million UK jobs are reliant on the EU and visa-less getaways pretty much whenever you feel like it.
There’s no doubt an exit will have considerable political and financial ramifications. And given its magnitude, a potential re-calibration of investment choices (specifically European centric ones) may be required.
So will Brexit go where Scout (Scotland Out – another one of our stellar originals) fell short? At the time of writing various polls are flipping between each side. June 23rd should decide once and for all.