Commentary on November 2019

FESTIVE GREETINGS FROM CHARLWOOD’S

Market Overview

A steady flow of claim and counter claim on the likelihood of a Phase 1 deal in the US-China trade talks teased stock-markets higher, producing repeated new highs in America. For the second consecutive month the strength in the British pound reduced overseas gains in sterling terms; US shares rose by over 3% compared to just over 1% in Europe. The UK showed disparity between the larger, more international companies that gained 1-2% and the mid-cap domestic shares that rose by over 4%. Asian and emerging markets were flat, as were bonds.

Throughout the month we were treated to constant rhetoric as both sides played games ahead of a much-anticipated Phase 1 deal in the US-China trade dispute. The perceived line in the sand is December 15th when previously announced tariffs are set to activate in the absence of a deal. In early December President Trump mused that perhaps a deal could wait until after the 2020 elections! Then for good measure he re-introduced tariffs on Brazilian and Argentinian steel imports and threatened new tariffs on a range of French goods.

Economic data provided gifts for both optimists and pessimists; forward-looking data continued to signal stagnant, or mildly contracting, growth but an improvement on the previous month. This was most evident in Europe where Germany avoided a technical recession and produced the most optimistic manufacturing outlook for 5 months. By contrast, declines in output, new orders and employment pointed to the UK economy shrinking during the fourth quarter, weighed down by political uncertainty.

Minutes from the most recent meeting of the US Federal Reserve Board confirmed the view that rates were on hold for now. Narrative stated that risks were still tilted to the downside but that they’ve eased sufficiently to mitigate these risks. However, any future shift in policy is more likely to see rate cuts than rises. In the UK, with inflation dipping to 1.5%, two members of the Bank of England’s Monetary policy Committee unexpectedly voted for a rate cut. Interestingly, in cutting its forecast for future growth the Bank signalled protracted, slow growth but not recession.

Our Views

The cynical view that so long as no trade deal is agreed then stock-markets will continue upwards in the hope of a deal proved correct. We, along with many others, are unsure if Trump is playing a very clever game ahead of next year’s election, or whether he really is economically illiterate; opinion probably favours the latter. His aim is to get a weaker currency which will help US exporters and in turn push US stock-markets higher; so far, with help from the Federal Reserve, he’s on target with the stock-market despite the strong dollar.

However, the unintended consequences of his on/off trade tweets are the longer-term damage to economies as uncertainty over future global trading relationships result in lower business confidence and weaker investment. Unlike stock-markets that rise and fall with Trump’s mood swings, long-term business intentions merely weaken.

The mood music is changing on two fronts. Firstly, negative interest rates, and to an extent quantitative easing, are falling out of favour with an increasing preference for fiscal measures; Japan, having initially led the way with QE, announced a new fiscal package last week. The work-around here for governments like Germany that are legally constrained from spending is to dress it up as voter-friendly ‘Green spending’; politicians in the US, UK and Germany are all looking at such measures.

Secondly, there’s a creeping air of cautious optimism that a global recession might be averted. Buoyed by consumer spending, economies have continued to grow, albeit slowly; global manufacturing remains weak but during November edged back into expansion territory. The UK remains the exception but will hopefully benefit from some post-election clarity on the initial stages of Brexit.

So, the optimistic outlook is for an extended economic cycle, supported by some combination of record low interest rates, quantitative easing and fiscal spending. The caveats are that US-China trade talks and Brexit negotiations remain unresolved and will continue throughout next year. We expect this to fuel doubts of any sustained economic recovery and add to stock-market volatility.

How are we currently positioned?

Following news that last week M&G Investments suspended dealing in its £2.5 billion UK property fund after ‘unusually high and sustained’ outflows, we’d like to reassure clients that our portfolios have no exposure to property funds; we sold our final positions at the start of the year.

During the annual rebalance we marginally increased risk, adding exposure to domestically focussed UK funds and including the infrastructure fund on our higher risk portfolios-this fund already features on the lower-risk portfolios.

We continue to prefer the value offered by UK equities; this stance has required patience, but we feel it offers better protection in a fully valued marketplace.