Tactical Asset Allocator: The dreaded ‘death cross’ spells more trouble ahead

Investor sentiment for developed markets has weakened, with some major indices displaying the dreaded ‘death cross.

The US trade war with China has deepened, with Beijing announcing new tariff s on 128 types of import after president Trump imposed tariff s on steel and aluminium in March. China’s response, which includes penalties on soybean, cars and aircraft, will damage key US sectors, such as farming. It’s ‘a lose-lose situation’ for all, according to the Organisation for Economic Co-operation and Development (OECD).

Tech stocks have also been rocked. Last month, concerns over how Facebook handles data collected from its users sent the sector lower, even before we learned that management knew the app at the centre of the leak could sell user data to third parties.

Moreover, Trump has set his sights on Amazon and could be moving in with anti-trust measures, claiming the colossus pays scant taxes and abuses the US postal system. While some of his ire stems from antipathy towards Amazon’s chief executive, Jeff Bezos, who also owns the Washington Post, the firm does have an advantageous deal with the postal service and its third-party suppliers do not collect tax. Amazon accounts for above 40 per cent of all internet retail sales, and its expansion into groceries will add to its muscle. The White House tweets knocked the share price by 5 per cent in two days, compared with a rise of nearly 64 per cent over the preceding year.

Tech stocks rocked

Meanwhile, crises elsewhere in the tech market – such as the dent in Tesla’s credibility over power steering faults in its Model S sedan, and Moody’s downgrade of the company for burning through its cash – are unnerving investors. Analysts have also lowered their estimates on Apple sales, while a report that Apple might ditch Intel has rattled the chipmakers.

-Five charts that spell trouble for tech shares

The surge in disconcerting tech news has devastated the market, and it’s easy to see why. Apple, Amazon and Alphabet have a market cap of $2.3 trillion, or 10 per cent of the S&P 500 index. Add in Facebook and Microsoft, and that is 15 per cent of the world’s biggest market.

Spotify takes stage

Against this inauspicious backdrop, Spotify pulled off its flotation in New York with a valuation of almost $30 billion (£21 billion), exceeding analysts’ expectations by around $5 billion. The music streaming business has 157 million customers and has converted 71 million onto its premium subscription service, but it has never made a profit and is vulnerable to Apple and Amazon, with their deeper pockets. This was a flotation with a difference, however: Spotify did not issue new stock and, instead, is selling shares held by its private investors.

Adding to concerns, Trump has linked his proposal to build a border wall between the US and Mexico to ongoing Nafta negotiations between the two countries, and plans to use the military to guard the border. He is under fi re from the right after signing a $1.3 trillion budget in March, which earmarks only $1.6 billion for border wall spending – only enough to repair existing structures – instead of the $25 billion requested.

Strip out tech, and the next largest S&P grouping is finance, also in difficulty. The plight of banking is most evident at German rival Deutsche Bank, where chief executive John Cryan is being ousted after three years for failing to reverse the bank’s lacklustre returns. Deutsche has turned in three annual losses in a row, and its 2018 cost-cutting plans have been shelved. Costs need to be cut in the investment bank arm and a review is said to be underway.

Despite the anxiety, guidance from US companies suggests better earnings than expected, not least from the boost from lower corporate taxes and other indicators such as manufacturing PMI, at their highest levels since 2015. Analysts have increased their earnings forecasts for 2018 since January, according to Bloomberg, and expect the tech sector to increase profits by 25 per cent, with chipmakers boosting profits by 31 per cent. They predict that finance will improve this year, lifting profit growth in the S&P 500 to 21 per cent in the third quarter.

-Buy, hold, sell: Why I’m still backing FeverTree

Meanwhile, the UK FTSE index and the German Dax are both down by around 8 per cent year to date. The chartists say that their ‘death crosses’ have been reached. This is where markets fall below their long-term trend line, which is then itself crossed by its short-term trend line – a double whammy universally taken to be a strong sign of a bear market.

Stock markets without ‘death cross’ signals are clustered in emerging Asia, China and Japan. These, and commodity-related investments, might have six months left in them.

Furthermore, frontier markets – those that lag emerging nations, such as Brazil and India – may not be as high-risk as believed, according to FE, a fi nancial analytics fi rm. Its research reveals that companies in frontier countries have consistently been less volatile than emerging markets over the past ten years. The firm looked at fluctuations in average weekly returns, and the frontier markets were signifi cantly less volatile over long and short time periods. This is because their economies are more domestically focused and less aff ected by global events than stock markets that are home to multinational companies.

Of course, to invest in these, you need to watch the politics, liquidity, corporate governance and accounting standards. The success of these countries also depends on commodity prices, particularly oil. However, newer markets could off er exciting returns.

Last month we invested in Vietnam. It is worth adding a tracker that off ers broader exposure, such as Xtrackers S&P Select Frontier Swap, or, for investors who prefer active management, T Rowe Frontier Markets Equity.

Stock Risk
Level*
Quantity Price
paid
(£)
Current
price
(£)
Weighting (%)
Lyxor ETF FTSE 250 81 1000 12.32 24.00 13.05
iShares Core S&P 500 UCITS
ETF
110 100 103.70 184.00 10.01
Euro Stoxx Total Market Growth
Large
104 325 18.14 30.89 5.46
iShares FTSE EPRA/NA Glbl Prop
Yield
84 402 13.38 17.82 3.90
Neptune European
Opportunities
104 1097 3.62 6.491 3.87
dbx MSCI Russia 25% Capped 214 400 17.64 20.66 4.50
Schroder Frontier Markets
Equity fund
n/a 80 100.00 128.57 5.60
iShares Japan Sterling hedged
ETF
139 200 47.41 58.83 6.40
Standard Life Investments
Emerging Market Debt
58 1300 5.15 5.74 4.06
DB X-TRACKERS DBX MSCI INDIA
ETF
143 900 6.59 8.65 4.23
DB X-Trackers MSCI EM Asia
Index UCITS ETF
129 420 24.12 39.07 8.93
iShares Global Clean Energy
ETF
n/a 300 3.59 4.04 0.66
iShares Physical Gold n/a 300 18.26 18.61 3.04
Polar Capital Global Insurance
fund
98 400 5.35 5.82 1.27
iShares Automation &
Robotics ETF
n/a 1000 4.66 5.66 3.08
iShares J.P.Morgan EM Local
Currency Bond
n/a 100 36.59 35.70 1.94
JPMorgan Emerging Markets IT 135 1000 8.46 8.61 4.68
iShares US Pharmaceuticals ETF n/a 100 116.00 105.27 5.73
iShares S&P SmallCap 600
UCITS ETF GBP
n/a 100 44.76 45.27 2.46
VinaCapital Vietnam
Opportunity fund
136 1000 3.58 3.47 1.89
Xtrackers S&P Select
Frontier Swap
n/a 500 11.72 11.715 3.19
Cash (see below) 2.05
Total 100.00
Notes: *Risk level is produced by FE Analytics and references the FTSE 100 as benchmark of 100. * £10 standard Interactive Investor dealing charge and 0.5% stamp duty deducted from cash holdings on new purchases and sales. Data source: Interactive Investor as at 5 April 2018

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