21/06/17

This is what elite fund managers are watching closely — and it’s not Trump or Brexit

High profile fund managers are ignoring the political turmoil, and placing their attentions on current corporate health and on the changes happening at micro-level, reports MarketWatch.

Fears of a eurozone breakup. Concerns over unrest in the Middle East. And an increasingly angry middle class frustrated by the sluggish pace of economic growth.

For years the financial markets have been swayed by such geopolitical threats — and the response of central banks to them — but that dance is over now, according to high-profile fund managers.

While political risks such as the U.K.’s Brexit and the Trump presidency featured highly in discussions at FundForum last week, many at the Berlin conference noted the market is now largely ignoring such political upsets. Instead, the focus is on the positive tone of updates coming from the corporate world.

“It’s bubbling on a micro level. It’s extremely exciting,” said Allan Polack, chief executive at PFA, Denmark’s largest commercial pension fund with over $75 billion in assets under management.

“In investing, there are always factors that point in different directions,” he said. “But there is one thing that I’m fundamentally positive about right now, and that’s what’s happening at a micro level. A lot of companies are currently doing really exciting things in terms of product innovation, distribution, [and] optimization of their value chain, and we’re seeing lots of fresh initiatives.”

That optimism about corporate health is supported by a surprisingly strong first-quarter earnings season in both the U.S. and Europe.

About 65% of the companies on the S&P 500 index SPX, -0.67%  beat revenue expectations, while 75% topped forecasts for earnings per share. Earnings overall rose 14%, the highest growth rate since the third quarter of 2011, according to FactSet data.

What’s more, full-year earnings guidances were generally better than anticipated, fueling hopes that corporate performance can drive U.S. stock markets to fresh records in coming quarters. Europe also surprised to the upside, scoring its best earnings season in seven years.

For the second-quarter earnings season, which is kicking off next month, earnings growth for the S&P is expected about to be 6.5%, the FactSet data show.

Uncertain backdrop

And all of this comes against a highly uncertain political backdrop. In the U.S, questions remain about President Donald Trump’s sudden sacking of former FBI Director James Comey, adding to doubts about the Trump administration’s ability to push through promised business-friendly policies.

Meanwhile, the U.K. has made little progress in negotiating its withdrawal from the European Union, almost a year after the Brexit referendum. Official talks with Brussels kicked off on Monday, but after Prime Minister Theresa May failed to get the parliamentary majority she needed in this month’s general election, the details of the divorce are still up in the air.

Those weren’t the only geopolitical events that seemed to loom large over markets, but then passed with little fanfare or damage to assets. Populism, or people’s “disenchantment” with the establishment, may also emerge as a concern in upcoming German and Italian general elections — but hardly left a mark on markets after the French presidential election in May, despite fears.

“[Looking at the past year] the biggest surprise is that despite populism, geopolitical upsets, [and] personality politics, markets are just reacting to fundamentals. Which is this: Cheap money and global stimulus persist, [and] there’s stabilization in commodity markets and a return of confidence,” said Stephen Jones, chief investment officer at Kames Capital, with $58 billion in assets under management.

“You wouldn’t have thought that with the headwinds in front of markets, equity markets would be at all-time highs,” he said.

 

“We are getting what we have spent nine years waiting for — a fully fledged, coordinated recovery,” - Stephen Jones, CIO at Kames Capital

The Dow Jones Industrial Average DJIA, -0.29%  last week logged its 21st record close 2017, while in Europe, the Stoxx Europe 600 index SXXP, -0.81%  is trading around 5% shy of its all-time closing high reached in April.

Even so, Jones said he’s still overweight risk assets such as equities. And within that, he prefers Europe over the U.S.

“We are getting what we have spent nine years waiting for — a fully fledged, coordinated recovery,” he said. “What you want to look at is participating in the earnings recovery that is going on in well managed, mid-cap companies on your doorstep in the European market place.”

Jim McCaughan, CEO of Principal Global Investors, was equally optimistic on the corporate sector and stock markets, although more so for the U.S. than for Europe. He dismissed, however, the so-called Trump trade — hopes for a corporate boost from the administration’s policies and spending — as the impetus for the rally in U.S. equities since the election back in November.

”I think the market has been strong primarily because U.S. companies have done quite well,” said the boss of Principal Global Investors, which oversees $424 billion in assets

“My basic argument on the U.S. is that it has a very strong private sector. And in some way, that will succeed in spite of Washington and not because of it,” he added.

Currencies as geopolitical ‘shock absorber’

While stocks and bonds have shrugged off the past year’s political tremors, there’s one asset class that hasn’t survived unscathed: currencies.

Immediately after the U.K.’s Brexit vote in June last year, the pound GBPUSD, -0.2771%  sank more than 20% against the dollar and is still far from reclaiming its pre-referendum level of $1.50 . Sterling was trading at around $1.28 on Monday as the Brexit talks got under way.

Meanwhile, the dollar DXY, +0.01%  has been buffeted by the drama coming out of Washington D.C., while the yen USDJPY, -0.29%   has served as a safe haven trade amid growing concerns over North Korea ‘s nuclear and missile programs.

 “On one hand, it’s been an extraordinary year in politics ... and markets have just continued to rise. It seems like they haven’t been sensitive to political risks,” said Michael O’Sullivan, chief investment officer at Credit Suisse International Wealth Management.

“I think there are two reasons for this: One is that the business cycle has been strong,” he said. “The second is that the place where people have priced in political risks have been in FX. So currencies have been the shock absorber of politics.”