By: Lyn Alden
With just two more market days left in May, it appears this month will be flat for TSP investors. Overall, the key driver for May was currency fluctuations, because minor changes in currency can have large short-term impacts on corporate profits and market indices.
The G fund has been completely flat, while the F fund has gained less than a tenth of a percent. The C fund has gained about 1.3%, which is pretty strong over the course of a month. The S Fund dipped by about one percent. The I Fund was the biggest gainer at over 3% so far in May. A smart diversified portfolio with all of these funds would largely balance out to where it was at the end of April, with small gains.
A Look at the International Scene in Regard to the I Fund, May’s Biggest Mover:
The international I fund is heavily weighted toward Japan’s economy. Japan’s index, the Nikkei 225, is up nearly 2% for the month on reports of rather strong economic figures.
Specifically, it was released in May that their economy expanded by 2.2% for the first quarter of the year. A sizable chunk of Japan’s current fortunes are due to the strengthening dollar compared to the yen. Ever since the US election, the US dollar has strengthened relative to many other currencies, hitting its peak in early 2017, but currently still resting ahead of where it was prior to the election.
Multinational corporations sometimes prefer their home currencies to be weaker compared to foreign currencies as it can lure investment and drive sales and other activity. For Japanese companies over the last two quarters, much of their revenue from exports has come in the form of a stronger currency (USD), while their labor expenses largely remained flat (in yen), which has benefited their profit margins considerably.
The long-term risk for Japan, however, is that their population is declining, which makes it exceptionally hard to grow an economy (See also, “>Think Twice Before Betting Big on the I Fund).
The UK’s index, the FTSE 100, is up about 4% for May. Out of all the main components of the I-Fund, the UK market has arguably the brightest future, which is not quite the same thing as saying their economy has the brightest future.
The reasons are that their market is currently inexpensive compared to historical norms, as measured by the CAPE ratio, their average dividend yield is quite high, and they retain control over their currency, which gives their economy more flexibility than countries tied to the Euro.
I’m personally more optimistic here than I am for the rest of the I-Fund. This month, however, the upward spike in the FTSE 100 was driven, once again, by a weakening of their home currency, the British pound.
The UK has an election coming up in early June that continues to resonate from the recent Manchester bombing – and with that backdrop their currency has dipped in strength compared to the Euro. Much like Japanese companies with a weak yen and a strong dollar, British companies do well when the pound is weak relative to the Euro, since their exports become a lot more profitable. A long-term risk, however, is that the British economy is oddly devoid of technology. Technology companies make up less than 1% of Britain’s FTSE 100, while they make up more than 20% of the US S&P 500 and should be factored into forecasts.
France’s index, the CAC 40, was flatter this month than the UK or Japanese market, and wasn’t a significant driver of the I-Fund’s gains.
They had a two-round presidential election during May, resulting in the win of a centrist politician by a large margin during round two. The runner up was Marine Le Pen, considered to be a far-right politician compared to the other three candidates, and if she would have won, the markets could have shaken upward or downward by more than they did due to there being a more substantial change in national direction.