Commentary on September 2019

Market Overview

Stock-markets had reversed most of August’s losses until poor data in the first week of October sent markets back to their summer lows. Fixed interest bonds, which had fallen sharply on a change in central bank policy, returned to near their record highs.

Forward looking Purchasing Managers Surveys around the world pointed to contracting growth and the prospect of imminent recession in several countries including Germany and the UK. The US remained in expansion mode, but the sharp deterioration in manufacturing and services indicators provoked real fears that recession was on its way. By contrast, American unemployment was the lowest in 50 years!

The European Central Bank (ECB) announced a further cut in interest rates (to -0.50%) and the re-introduction of quantitative easing (QE) to boost the slowing economy. This was in line with expectations, but the announcement of a unanimous verdict in favour of fiscal policy becoming the main instrument going forwards did surprise investors and triggered a sell-off in the bond market.

The US Federal Reserve cut interest rates by a further 0.25%; however, this decision wasn’t unanimous, and the accompanying statement signalled that, despite uncertainty over the effects of the trade dispute on future growth, there could be a pause before further cuts. This predictably provoked the ire of President Trump who fired off a series of disparaging Tweets referring to members of the central bank as “Boneheads” and “Pathetic”.

Meanwhile, US-China trade talks and Brexit acrimony continued with little tangible progress on either front; in the case of the former, the US offered to postpone some tariffs as a sign of goodwill. As is so often the case a new dispute threatened when the World Trade Organisation gave its blessing for the imposition of tariffs on European exports to America in retaliation for subsidies on Airbus.

Our Views

There’s been a subtle change in what’s driving markets; for the past three years the focus has been on politics and their implications for future growth. Attention has now shifted to economics and signs of the damage that has been caused by the reversal of global trade co-operation and Brexit uncertainty. Tariffs, whether real or threatened, have led to strikingly large falls in export markets, notably Germany, Singapore and South Korea, and a global contraction in manufacturing. Further, the effects of existing trade taxes are seen in the fall-off in investment spending; companies are less likely to commit to new projects when the supply chains that have been built up over many years are being threatened.

We’ve mentioned before the Brexit paralysis suffered by many UK firms, with investments and new orders being deferred, and overseas companies seeking new suppliers from outside the UK. Recent data suggests that this is now having a negative impact on employment, though so far this has been more through not replacing leavers, rather than issuing redundancy notices.

Despite the gloomy outlook for industry, record numbers of people remain in work, with earnings rising by more than inflation, and very low mortgage and borrowing costs. The question remains as to whether the consumer can continue to bail out the economy or whether the fear of job losses becomes self-fulfilling as people rein in their spending.

Whilst we remain cognisant of the background of low, and falling, interest rates we feel there’s a bit more nervousness around at the moment. In the past ‘bad news’ has been ‘good news’ because it led to further monetary stimulus which boosted asset prices, but the feeling now is that the real economy needs a boost and that this should come in the form of government spending. Optimism could return with a definitive outcome to Brexit, genuine progress in trade talks or perhaps Germany leading the way with a fiscal stimulus package, but in the near-term our focus will be on capital preservation.

How are we currently positioned?

In the current climate we feel that it’s prudent to further reduce risk across the portfolios and are currently reducing exposure to some global funds whose bias towards US stock-markets have resulted in strong performance.

We remain underweight fixed interest, preferring equities and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.

The UK doesn’t look in a good place, but more bad news is already priced into its shares than in other developed economies. This will not protect the UK in the event of a global sell-off, but we believe it provides a more compelling case when the search for value returns.