Commentary on April 2019
In a month where Easter gave us a welcome sun-kissed break from the dual politics of Brexit and US-China trade talks, there was a brief pause before stock-markets pushed higher with the main US indices ending the month at record levels. Shares in the US and Europe led the way, rising by around 4%, whilst Japanese, Asian and emerging markets put on a couple of percent. Performance across UK sectors differed markedly as smaller, domestic companies gained 4-5%, boosted by the prospect of a weaker Brexit deal, out-performing larger, global shares by 2-3%. Bonds ended the month fractionally lower.
Forward guidance from leading central bankers was to focus on something else because interest rates were unlikely to move in the US, UK or Europe for the rest of this year-at least! The US Federal Reserve voted to leave interest rates unchanged, signalling that they didn’t expect them to move this year. Fed’ Chair, Jerome Powell, repeated that policy could still shift in either direction as members “grappled with significant uncertainties”, namely balancing solid economic growth and strong employment data with slowing business investment and consumer spending. This upset both President Trump and investors who had been expecting a more dovish performance; Trump had previously ‘advised’ that rates should already be 1% lower.
Head of the European Central Bank, Mario Draghi, expressed confidence that subdued growth in the Eurozone would bounce back, but offered reassurance that interest rates would remain on hold until at least the end of 2019.
In the UK the Bank of England’s Monetary Policy Committee presented its quarterly inflation report. The ‘glass-half-full’ brigade noted that future growth had been revised up and the inflation forecast had fallen, conjuring up a wonderful post-Brexit goldilocks scenario with no rate rises until 2021. By contrast, the ‘glass-half-empty’ crowd pointed to Governor Mark Carney’s warning that the Bank of England’s current forecast for inflation would require more rate rises than are priced into the bond market.
Corporate earnings and economic data were a mixed bag over the month. Forward-looking surveys suggested some improvement on the previous month’s weak showing, but still pointed to subdued activity with uncertainty over Brexit and global trade talks keeping order books and investment intentions low.
After a blistering start to the year (UK and European markets up by over 10% and the main US index 16% higher in sterling terms), we think it’s quite reasonable that stock-markets pull back a bit; at the time of writing, markets have fallen by around 2% following Presidential Tweets threatening to derail the US-China trade talks.
Twitter apart, the maturity of the business cycle and recent weaker data is a cause for some concern. But we need to look beyond the headlines and differentiate between fears of an outright recession and a plausible slower-growth scenario. Share prices after the sell-off in the fourth quarter of 2018 reflected a 65% probability of an American recession-at the end of April this had fallen to just 15%. No doubt this change of view was swayed by the US Federal Reserve’s more dovish tone, but it also highlights the swinging emotions of investors rather than positive economic newsflow.
Activity will probably remain subdued until the two issues, Brexit and US-China trade talks, are resolved; growth has been temporarily boosted by stock-piling of inventories due to uncertainties relating to the above, but major orders and investment projects are on hold until businesses know what they’re dealing with.
The downside is that both issues are following political, rather than economic, agendas with timetables for resolution continually being kicked further down the road. On the plus side, central bankers are aware of the fragility of economies and are more prepared than in previous cycles to keep rates close to historic lows and to keep an open mind on the direction of future policy.
For now, we need more evidence before getting too concerned about growth. Brexit negotiations look to have avoided the ‘No Deal’ option that was most likely to hit UK domestic shares, and we know that President Trump’s main objective is to get the US stock-market higher as the 2020 election approaches. We expect periods of volatility as investors react to economic and geo-political events but, with interest rates so low, investors are likely to look to the markets for a higher level of income.
How are we currently positioned?
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.
In equities, our preference remains the UK, where we think valuations already reflect concerns over an economic slowdown and yields compare favourably with other asset classes.
With so much uncertainty around the world, accompanied by record levels of debt, we believe there is a strong case for running well-diversified portfolios, investing in actively managed funds with sound investment processes.