Stock markets rise despite growing Syria tensions

Markets are still poised for the possibility of military conflict erupting in Syria between the US and her allies (Britain, France, Saudi Arabia and possibly Turkey) and Russia, with the backing of Iran and the Syrian regime. While NATO members are preparing a response to the alleged chemical weapons attacks in Ghouta, Trump’s Defense Secretary James Mattis warned any strike should be carefully planned to avoid a major conflict between the superpowers.

Even if a war is avoided, the events of the last 2 weeks (including US sanctions on Russian businesses and oligarchs) have severely damaged US/Russia relations. Reports say Russian lawmakers have drafted legislation which proposes to ban American imports including software and medicines, as well as stopping cooperation on atomic power and more.

The American sanctions put in place a week ago, caused the Russian RTS index to fall -11.4% on Monday, it’s biggest one-day decline since December 2014. The Russian Ruble also suffered a dramatic fall against both the Euro and Dollar as foreign investors pulled out of Ruble-denominated Russian government debt.

At the moment, peace reigns and stock markets are in positive territory. European indices are on track to make weekly gains despite geopolitical worries. The FTSEurofirst 300, which tracks the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index, is up for the week despite geopolitical turbulence (see the chart below).

Keep in mind that in the long term, a US strike in Syria may not have too much of an impact on indices, and may only cause a short term bearish movement. It all depends on whether the situation deteriorates further. Right now NATO countries seem to be waiting on Trump’s administration to act, but what they will do is no clearer now than it was earlier in the week.

Eurofirst

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Trump adviser Kudlow calms the markets. Is now the time to buy the dip in stocks?

President Trump’s key economic adviser Larry Kudlow (pictured) jumped into action to try and soothe volatile stock markets yesterday, which were flagging at the open due to China’s announcement of retaliatory tariffs on over 100 American goods. Speaking to Fox Business, Kudlow said Trump’s tariff plans were just “the first proposals”. He added: “In the United States at least, we’re putting it out for comment, it’s going to take a couple months. I doubt if there will be any concrete action for several months.”

The statement seemed to indicate the US is flexible in its approach, and may soften tariffs. Perhaps all of this could just be Trump’s ‘art of the deal’ in action – talking tough to make China come to the negotiating table. Regardless, stocks moved up at the close after the big early selloff yesterday. The S&P500 closed up 1.15% higher. Investors took Kudlow’s words as a good thing.

Is it time to buy the dip in stocks?

It could very well be. Fear over the trading situation between America and China was a significant part of the reason why stock prices (particularly in key US indices) fell over the past month. However, now that reports seem to indicate the two nations are trying to find a way to resolve the dispute behind the scenes in private talks, it seems there is a chance that fears of a full-scale trade war may not come to fruition. Any confirmation of a cessation of hostilities over trade may prompt a surge upward for stocks, not to mention the fact that the start of the earnings season is just around the corner – another potential boon for stock market indexes.

Buying the dip in stocks ahead of the upcoming earnings season could bode well for investors, historical data from Jefferies shows. Analysts at the bank said in a note last week that the S&P500 averaged a gain of nearly 2 percent during an earnings season since 2000 when the period follows a monthly decline.  Keep this in mind as the U.S. earnings season kicks off on April 13 with J.P. Morgan Chase, Wells Fargo and Citigroup releasing quarterly results!

It was a tough first quarter for equities. Here’s some reasons why…

It has generally been a rough first quarter for global stock markets. The rip-roaring gains that made 2017 so lucrative for investors came to a screeching halt in the first 3 months of this year.

The Nasdaq index, which boasts the biggest names in American tech among its constituents (including Apple, Amazon, Facebook and Nvidia among others), went into the red (a loss) for the year after a 3.5% fall during trading this week. The weakness came as investors worried about the future profitability of these companies, in light of a spate of bad press for them recently.

For example, Facebook shares were pulled down by over -12% for the month due to concerns about user privacy following the Cambridge Analytica scandal, while Amazon stock has been under pressure after coming under fire from Trump as well the European Union, which has had the Bezos behemoth in its sight for some time. Last month, the European Commission revealed plans to clamp down on the market dominance of the business of Google amongst other tech titans including Amazon by aiming to tax consumers differently.

Nvidia shares took a large hit too this month (down over -5%) after the firm said it would be halting tests for its autonomous vehicles in light of an incident in which a self-driving Uber hit and killed a pedestrian in Arizona.

The broader picture for stock markets

Despite individual company woes, the broader macro picture is also worrying the markets. It seems reasonable to point out that a lot of selling may be taking place off the back of worries about the future of the US/China trading relationship. In response to President Trump’s tariffs on steel and aluminium enacted last month, China unveiled retaliatory duties worth $3 billion on US food imports, which was quickly followed by tariffs for over 100 goods on April 4th, including cars, certain aircraft, tobacco products, whisky and many others.

Investors will be watching closely for any further escalation in rhetoric and action. Given that both economies provide so much to the engine of global economic growth, the outcome of the trade dispute will be seen as very important for investors trying to predict the future for world stock markets.

A tale of 2 construction stocks – Balfour Beatty announces major profit 2 months after Carillion collapse

While British construction services company Carillion collapsed in spectacular style earlier this year under the weight of its huge debt burden, another UK construction giant that worked alongside it has seen its shares rise (see below) after revealing record profits.

Balfour Beatty said today its annual underlying pretax profit had almost tripled to £165 million by the end of 2017, from £62 million a year earlier, as it’s construction unit bid more selectively to win profitable contracts.

The gains for the firm are a testament to the benefits of a prudent strategy in picking projects, as opposed to Carillion, who took on more than they could chew.

The Chief executive of Balfour Leo Quinn explained it narrowly avoided the same fate as Carillion by reforming its business in the past few years.

Quinn said to BBC Radio 4: “We had our own near-death experience three years ago – eight profit warnings, £600m cash outflow in nine months from the company. These results today demonstrate an amazing transformation and turnaround.”

The company, which is behind the Crossrail project, was directly affected by Carillion’s liquidation – suffering a one-off-loss of £44 million on the Aberdeen Western Peripheral Route project as a result of Carillion’s fall.

The stellar reversal of fortunes for Balfour Beatty comes as the UK’s construction sector contracted for the ninth month in a row in March.

Balf
Balfour Beatty (BBY) shares have risen throughout mid-March

Foreign investors move out of Indian stocks for now but future is brighter than ever for India’s economy

Indian stocks fell out of favor with overseas investors last month, with markets cooling slightly after a stellar 2017 performance. New data showed foreign institutional investors pulled out $1.5 billion from Indian shares in February, following the market correction in the U.S. which hurt global indices, on top of fears concerning the Punjab National Bank, which is at the centre of a $1.8 billion fraud case.

Gautam Chhaochharia, head of research at UBS Securities India said: “Our global strategists like Korea, Indonesia and Brazil the most.” He added: “A year ago, India was the market with least hassles in its path, but now, other emerging markets look better off in comparison.” Indeed, Brazilian and even Russian indices rode out the last month far better than their Indian counterparts. This Monday the NIFTY50 made a small recovery heading back to the 10,600 mark.

However these figures don’t tell the full story. Regardless of the recent blip in the equity market, India’s economy is still powering ahead as one of the fastest growing in the world, with plenty of praise being handed to the nations leader Narendra Modi for his implemented economic reforms which are making India more business friendly.

Indeed, India has plenty of reasons for positivity on the economic front. The country has vast supplies of natural resources which are relatively unexplored, and also has a huge need for new infrastructure projects, not only physical, but also in terms of digitisation due to its massive rural population. This presents major opportunities to foreign investors seeking to take advantage of a rapidly developing emerging economy. As digitisation expands it will bring benefits not least to these more isolated communities but also to foreign companies, because more access to the internet will draw in more and more e-commerce customers, a trend which Walmart has already taken an interest in. In 2013, India had 30 to 40 million internet users, while today the number is estimated to be over 400 million. Once again, these shifts will undoubtedly be a major pull for overseas investors.

On top of this, India has a flourishing middle class. By 2020, India is projected to be the world’s third largest middle class consumer market behind China and North America. By 2030, India is likely to surpass both countries with consumer spending of nearly $13 trillion. The Indian population’s interest in investing in stocks has also grown exponentially – domestic mutual funds got a whopping $20 billion in 2017, around double from the year before, mostly due to average (non-institutional) investors, who were looking to take advantage of the awesome stock market rally during the year, instead of sticking with more traditional choices like gold or real estate to put their cash into.

All signs point to a thriving economy in the long term. Indeed, the latest set of economic data for Q4 2017 showed India’s economy expanded 7.2 percent year-on-year for the period. That is well above the upwardly revised 6.5 percent advanced in the previous period and above market expectations of 6.9 percent.

Overall, whether foreign institutional investors are confident on Indian equity markets or not right now, the future looks bright. All of the fundamentals are in place which make India one of the hottest places on earth to invest.

JPMorgan Co-President warns of 40% correction in stocks – is he too pessimistic, or bearish?

JPMorgan Chase Co-President Daniel Pinto thinks the stock market is set for a 40 percent fall in the next 2-3 years, a move down which would end up wiping out the last 2 year’s of gains in the market rally stateside.

Speaking to Bloomberg Television, Pinto said: “We know there will be a correction at some point”. He added: “We are at an interesting time. We are 2-3 years probably until the end of the cycle and markets are going to be nervous. Nervous to anything that relates to inflation, nervous to anything that relates to growth. And I think tariffs – if they go a lot beyond what has been announced – it is something that will concern markets about future growth.”

These are big ‘ifs’ though. Trump wont necessarily escalate trade action at a more rapid rate. Indeed, as you can read in the final paragraph of this article, the administration has left the door open for other countries to adjust their own trade practices in return for tariffs being modified or removed completely. If other nations including China stop flooding the market with so much cheap steel, helping the U.S. to address its colossal trade deficit, Trump may be willing to soften more, and this would be another major boon for the markets, which are already starting to benefit from the Republican tax reform package passed in December last year.

So much depends on whether trade relations deterioriate further, and whether other leaders including China’s Xi Jinping are willing to concede to a more aggressive U.S. trade policy, or fight back even harder. Given how much both countries depend on eachother economically, its more likely that both leaders will be pragmatic over the issue, but if they aren’t, then Pinto’s forecast could come true.

For now though, even despite worries concerning inflation, the speed of Federal Reserve interest rate rises, the withdrawal of monetary easing and the prospect of another major correction in the markets like the one we saw in late January / early February, stock prices keep rising and indices keep moving upwards. The chart below shows how quickly the benchmark S&P500 index is recovering after that sharp fall earlier this year, even with all the noise in the press about chaos in the White House and warning signs in the economy.

SP500

Robust financial results for American companies through the first quarter of the year show us that the underlying fundamentals of the U.S. economy are strong, which is why investors keep buying back in. By February 8th this year, 322 S&P500 companies had reported quarterly results during the latest earnings season, and 78 percent of them beat Wall Street estimates. According to Thomson Reuters data, that was the best rate of above-estimate earnings since Q3 2009!

Besides this, the latest labour market data released today showed the U.S. economy added 313,000 new jobs in February, the biggest gain since mid-2016 and a reflection of the strongest labor market in two decades.

Then there’s the North Korea breakthrough – whereby Trump is set to meet Kim Jong Un in May, the first ever meeting between a sitting U.S. President and sitting DPRK leader in history. If relations between the 2 were normalised, this would be a huge relief to Asian stock markets and those in the U.S. boosting investor sentiment even more.

Overall, I’d argue Pinto’s case looks a little bit too bearish considering the data we are working with right now, but anything could happen in the next year or 2.