Monthly Commentary – June

In sterling terms, global markets were little changed in June. The month was characterised by considerable volatility, however, as concerns grew over the US’s apparent willingness to wage trade war on the rest of the world. The US administration was reported to be considering blocking China’s access to US technology, and President Trump also took to Twitter to chastise Harley-Davidson for its decision to circumvent protectionist measures by moving some production out of the US. The President told the company it would be “taxed like never before”.

Although President Trump’s meeting with North Korea’s Kim Jong-un in Singapore was largely seen as a success, it had little effect on markets. Nor did the widely anticipated US Federal Reserve’s decision to raise interest rates by a further 25 basis points. More significantly, however, the European Central Bank signalled that it would bring its €2.4 trillion asset-purchase programme to an end. This raises the question of how markets will respond to a world without quantitative easing, a policy that has helped to sustain asset prices since the financial crisis.

With its sterling return amplified by the strength of the dollar, North America was by far the best-performing region. Europe was the only other major region to produce a positive return. Emerging markets were notably weak. Both Latin American and the Asia-Pacific (ex Japan) region registered declines as foreign investors withdrew and local currencies slumped.

Given all the global uncertainties, it was perhaps unsurprising that the strongest sectors were those traditionally seen as defensive: consumer staples, utilities and health care. Cyclical sectors were the main laggards, with industrials, financials and materials all producing negative returns.

The future composition of the US Supreme Court was much discussed in June after Justice Anthony Kennedy announced his retirement. But for us, a more immediately interesting development was the Supreme Court’s ruling that opens the door for US states to collect sales tax from online retailers even if they don’t have physical presences in the state in question. This potentially removes a key disadvantage faced by bricks-and-mortar retailers.

Among the beneficiaries could be two of our portfolio’s ‘ugly ducklings’: GAP and Macy’s, which were among our best performers in June. Shares in these two US retailers have long been out of favour, as their sector adjusts to changing shopping habits. But we believe that investors have been premature in forecasting the demise of physical shops. Shopping can be seen as a leisure activity rather than merely a utilitarian act, and people like to see and feel what they are buying. By taking an ‘omni-channel’ approach, traditional retailers gain advantages through their physical presence and the greater convenience of collections and returns. The Supreme Court’s decision levels the playing field on price, allowing the likes of GAP and Macy’s to press these advantages home and challenge investors’ negative perceptions.

These stocks exemplify the kind of undervalued opportunity that we seek out for our portfolio. The current bout of global turbulence is likely to throw up many more such opportunities, as investors tend to overreact to developments. We will be watching carefully for them as they arise.

*As at 6 June 2018

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.