Ncola Chapman, Investment Director, Quilter Cheviot Investment Management

This month we asked Nicola Chapman, Investment Director with Quilter Cheviot Investment Management for her outlook for the remainder of 2018.

“2018 is proving interesting for investors. Equity markets surged upwards at the beginning of the year, but have been more subdued in recent months, as rhetoric (and some action) around trade tariffs have come to the fore. Despite that, US equities have now entered their longest bull market on record, even if returns for this bull market have been lower than that of the 1990s.

For the meantime, the global economy appears to be in good health. Growth in Europe has slowed a bit, but the US economy remains strong, and China appears to be doing well too – despite some headwinds from economic reforms.

That represents a broadly positive backdrop for equity markets. However, the picture is more nuanced as you look across different regions. US earnings continue to be revised upwards by analysts after a series of strong reports for the second quarter of this year. The US also benefits from having a large number of technology or technology related companies. Stocks such as Amazon, Microsoft and Google have performed strongly in recent years, and have built up a lot of momentum. But with their earnings look set to continue growing, we believe they are still attractive and worth holding.

Other regions look more challenged though. We have relatively little exposure to UK stocks, largely due to the negative outlook from Brexit. This could change if we see a shift to a softer final deal between the UK and the EU, but there has been increased speculation of a no deal in recent months, particularly in the UK press.

Where we do invest in UK companies, we are looking for those with international earnings. Internationally focussed businesses, with earnings denominated in a currency like US dollars, can expect to benefit from a weaker pound if we do see a bad deal. This overseas exposure effectively gives them some protection against a bad Brexit deal.

Risks for the remainder of the year largely centre on the US. Donald Trump’s administration has been much more aggressive on trade policy this year, having imposed a 10% tariff on $50bn of exports from China to the US. A further 25% tariff is now being proposed, which would mark a significant escalation. The Chinese may be forced into further retaliation, although they have been able to offset most of the increase in tariffs so far by allowing their currency to devalue.

Emerging markets are perhaps most sensitive to changes in tariffs as they typically rely on exports for a greater percentage of their GDP than other economies. They also face risks from the US Federal Reserve raising interest rates, with the central bank poised to deliver another two hikes over 2018. That could underpin further strength in the US dollar, commonly seen as negative for emerging market equities and local currency debt, as well as commodities like oil or gold.

Countries dependent on foreign financing, such as Turkey, are most vulnerable. Investor confidence has been damaged by President Erdogan’s intervention in economic policy, constraining the central bank’s ability to tackle rising inflation and protect the lira. Diplomatic tensions with the US have increased the pressure, with Trump deciding that sanctions can be just as effective a diplomatic weapon as an economic one. There is a clear risk of contagion where negative sentiment spills over to other emerging markets. This is especially the case for other countries with high current account deficits, such as South Africa.

The most important thing for us as investors is to watch what happens to economic growth. It’s relatively difficult for companies to assess how increased tariffs will affect them exactly, particularly those with complicated products that have a lot of inputs.

We also need to bear in mind how increased trade tariffs might distort the economic numbers we are reading. If we see strong US import figures, for example, does this mean that the economy is booming and sucking in a lot of goods from abroad, or does it reflect companies trying to buy more before tariffs come into effect? Cross-checking data points can help us to get a better idea, as well as looking at more anecdotal evidence too.

As we move into the second half of the year, we will continue to monitor developments around trade and Brexit. However, there are still opportunities across markets. Energy companies, for example, have benefitted from the turnaround in oil prices, while their management teams are still cautious on how they plan to spend the extra money. This potentially leaves cash available to return to shareholders.

There are also plenty of structural growth opportunities from a longer-term perspective. These are areas that benefit from changes in the economy, rather than the economy just getting bigger. Ultimately, it’s long-term investing that will make the difference for people – if you participate and think carefully about your investments, you are likely to do well over time.”

Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.

Should you require any further information with regards to Quilter Cheviot and they’re offerings, please contact our office on 01 4972544 or alternatively you can e-mail ross@hegarty.ie