According to Rothschild, the softness in the first quarter will prove a short-lived aberration, much like the first quarter of 2014, when the economy actually shrank only to rebound and grow for the year as a whole by 2.5%.
In his April 2105 market perspective report, Kevin Gardiner of Rothschild Wealth Management notes that thanks to the ECB’s intensified buying, bonds have become more expensive again.
US economy’s current soft patch is temporary
The Rothschild analyst points out that the US economy has slowed markedly, with estimates for annualized U.S. GDP growth for the first quarter currently running at around only 1%, which translates into a non-annualized quarter-on-quarter gain of just 0.2% to 0.3%, or a near standstill. However, the analyst continues to give the U.S. economy the benefit of the doubt, though thanks to a stronger dollars, some commentators are proclaiming another big downturn is upon us.
Alluding to reasons for the softness in the past three months, Gardiner notes the softness reflects a combination of even-worse-than-usual winter weather, industrial disputes at West Coast ports, and cutbacks by the energy sector driven by the fall in oil prices. The analyst notes the energy cutbacks are not transient, as Saudi Arabia still seems reluctant to tighten its taps.
Sounding a cautionary note, the report points out that there have been a few signs of the sorts of excesses that can trigger a recession. As can be deduced from the following graph, the U.S. private sector continues to run a healthy cash flow surplus, and is effectively a source of liquidity to the wider economy:
However, Gardiner believes the scenario might change as consumers start spending a higher proportion of their incomes and invest in more new homes. Thus the report notes aggregate liquidity may eventually be squeezed again and borrowing will undoubtedly revive.
Stocks are reasonably valued
Keep in mind that the inflation-adjusted one-fifth expansion of the global economy since the pre-crisis peak is not attributable entirely to the actions of central banks. Highlighting that the global outlook has changed little, the analyst notes though the U.S. is still the most important driver of global capital markets, its relative importance is slowly fading and the next big cyclical surprise could come from elsewhere.
Gardiner believes U.S. interest rates are till set to rise later this year, though the timing may slip as a result of the current soft patch.
Turning their focus to higher US rates, the report notes this remains perhaps the most obvious source of the long-awaited setback in developed world stock markets. However, thanks to the Fed going out of its way to prepare markets, it’s doubtful the setback will be overly large or long-lasting, and long-term investors should probably sit tight.
Gardiner notes a rule of thumb for “fair value” bond yields is that they should roughly match the trend rate of nominal GDP growth, viz.: the aggregate of real growth and inflation. He points out that this has worked remarkably well over the past 60 years in both the U.S. and UK, and average long-term bond yields have been within half a percentage point of nominal GDP growth. However, as depicted in the following graph, if we split the period into two halves, fair value has not worked as well:
However, gardiner doesn’t recommend bonds as investments, as he believes current yields offer little chance of safeguarding real wealth.
The Rothschild report also focuses on the UK general election. The report suggests investors need to do very little ahead of the general election. The report points out that the UK stock prices have flatlined since 1999, while gilt yields have now completely retraced their post-war ascent:
Updates on TM New Court Fund
Updates on TM New Court Fund as gleaned from Rothschild’s Quarterly Report for April 2015 are provided. The authorized non-UCITS retail scheme unit trust was launched in October 2011 and rose by 5% during the first three months of the year. The fund returns were aided by good performance from stocks, external managers as well as favorable movements in currency markets.
The following graph captures the key data points since the fund was launched:
Among the companies the fund invests in, the best performances came from the dollar earners in Europe. AB InBev was up 21.2%, Unilever 8.0%, Ryanair 17.3% and Ericsson 14.8%, all in local terms. The following captures the top five contributors and losers of the fund:
Pershing Square Holdings was the stand-out performer among the fund’s external managers. Turning to currencies, the recent moves in exchange rates have aided the fund in a number of ways, including dollar’s appreciation by 4.7% against sterling to $1.48. Moreover, the weakness of the euro has also boosted both the earnings prospects and share prices of the European companies the fund invests in. However, the fund decided to sell its long-standing position in gold during the first quarter, as it believes the downward pressure on the gold price may begin when U.S. interest rates start to rise.
The following table sets forth the fund’s holdings across various asset classes: