Market Review – US stock market bull run breaks records
Andrew Milligan | September 12, 2018
Now that we’re definitely in one of the longest bull runs in history, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, discusses what’s driving the US stock market and what’s causing emerging markets to blow hot and cold. He also takes a closer look at the UK stock market and considers the key challenges and opportunities facing UK investors in the lead up to Brexit completion.
Bull run in US stock market breaks new records
North American markets continue to go from strength to strength and reached record highs in the month of August. But why is the US stock market performing so well?
At present, there are two main drivers of US share prices. One is cyclical and the other structural. The US economy was growing pretty strongly into 2017, but this year it’s benefitted significantly from the wave of tax cuts and spending increases proposed by President Trump. In the second quarter, overall activity was over 7% higher than it was a year earlier and that’s helped US companies achieve profits growth of 17% more than this time last year – even more if all the benefits of tax changes are included. In a world of slow or slowing growth the US certainly stands out.
The structural aspect relates to technology. The tech and communications sectors make up 25-30% of the US stock market, that’s similar to parts of Asia but much higher than in Europe, the UK or Japan.
The growing importance of Alphabet (Google), Amazon, Apple, Facebook, Microsoft and similar firms is abundantly clear. Just a few weeks ago, Apple became the first firm to have a market capitalisation of $1 trillion shortly followed by Amazon, which has also reached a $1 trillion market capitalisation. To put this in context, the market cap of the FTSE® 100 index in dollars is just below $3 trillion.
US and Mexico reach a trade deal
Markets were indeed cheered by the announcement that Mexico and the US had reached preliminary agreement on a revised trade treaty – the North American Free Trade Agreement (NAFTA). After weeks and months of negative press about possible trade wars, this was welcome news.
However, the proof of the pudding is in the eating. There were fewer details than investors would have liked to see, and the details that were revealed were more supportive of the US than the Mexican economy – it’s clear President Trump is trying to bring jobs back home.
Investors would be more reassured if the US managed to reach an agreement with Canada too, and tensions with China fell back too. But, at the time of writing, that remains up in the air.
Emerging markets – in crisis or beginning to stabilise?
Firstly, it’s important to differentiate between the few high profile emerging market countries that are in trouble, like Argentina and Turkey, and many other economies where the fundamentals, such as balance of payments, overseas debt and central bank policy-making, are much more solid.
That being said, in recent months we have seen the baby thrown out with the bath water as many investors have sold broad based emerging market funds on concerns about a small group of emerging markets with large current account deficits or governments unable to push through difficult decisions. Argentina, Brazil, South Africa, Turkey and Venezuela are top the list.
There’s now a view that the valuations of many emerging markets are more attractive, that’s why we’ve seen a little more stability in July and August. For this value to be released though, we’ll need to see a catalyst such as a major change of view by the US central bank, a stimulus package in China or a pull back by President Trump on trade war talk. These are the sorts of triggers to bear in mind.
What’s next for the UK stock market?
As we approach the autumn, US, European and even some emerging markets look poised to rally but sadly we can’t say the same for the UK. We expect the UK stock market to continue to lag behind the others in terms of corporate profits growth and the ability to pay out rising dividends. The main uncertainty here will depend on the value of the pound and the outlook for Brexit and UK politics.
The FTSE® 100 group of companies derives about two thirds of its revenue from operations outside the UK. So a weaker or stronger pound versus the dollar and euro is, generally speaking, a positive or negative for larger company earnings, as these revenues are worth more or less when converted back to sterling. For now though, at Aberdeen Standard Investments, we remain overweight in other global equity markets in our portfolios.
Brexit – challenges and opportunities for UK investors
Brexit has mattered and will continue to matter for the pound in our pocket and the profits of UK businesses. However, it’s important to recognise that the UK’s relationship with the EU is not the be-all and end-all, as some newspaper columnists and politicians would have you believe.
There are much more significant risks and opportunities investors should be aware of. For example is there a US recession or a Chinese debt crisis on the horizon?
And when it comes to opportunities, there are major developments in areas such as artificial intelligence, machine learnings, robotics and autonomous vehicles. These have the capacity to be game changers. Small firms can grow quickly.
On top of that it’s important to recognise that the UK stock market contains many companies whose business models won’t be particularly affected by the outcome of Brexit. Some of the biggest FTSE® 100 constituents are global mining or energy companies with very few operations in the UK or Europe.
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The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. The information is based on our understanding in September 2018.