Commentary on February 2019
New-Year optimism carried over from January, sustained by belief that US monetary tightening was all but done, trade talks between the US and China were heading for a positive outcome, and that if the UK did ever leave the EU then it would avoid the ‘No Deal’ option. Stock-markets rose by 3-4% in local currencies but a strengthening pound reduced these gains by around 1% in sterling terms. Bonds were generally flat on the month.
Global growth (outside of the US) continued to slow, with indices pointing to contracting manufacturing across several major players, notably Germany, Japan and China; German factory orders fell by 7% compared to a year ago.
Purchasing Managers’ Index (PMI) surveys pointed to a UK economy close to stagnation; despite record levels of employment, growth had stalled with the biggest fall in new orders since 2009. Ongoing Brexit negotiations, votes and amendments produced nothing positive, though UK assets and currency strengthened on the belief that Brexit options now ranged from a partial exit, in the form of Theresa May’s disastrous Withdrawal Agreement, to never actually leaving.
Members of the US Federal Reserve were at pains to correct investors’ perception that ‘being patient’ meant that the next move in rates would be down; more that they were in no rush to make a judgement about changes in policy in either direction. Fed’ Chair, Jerome Powell, saw a ‘favourable economic outlook with some cross-currents,’ but also said that members were ready to adjust balance sheet normalisation if needed; this was taken positively as hinting at an end to quantitative tightening (QT).
President Trump oversaw ongoing trade negotiations with China, held, and then prematurely left, peace talks with North Korea, and hit out again at the Federal Reserve for keeping interest rates too high, whilst also claiming that America was booming!
Hopefully, March will present a clearer picture of where the world is heading. Centre-stage, there’s potential for the makings of a US-China trade deal to be hammered out, possibly followed by a reversal of previously implemented tariffs, taking pressure off the US consumer. More locally, we can but hope that the array of mid-month votes in parliament lead to an agreed exit strategy, even though it would take to beyond the deadline to address the finer points.
Our view is that the biggest threat to the UK economy would come from a further delay to the Brexit process; for some months now, the lack of clarity on how, or if, we leave the EU has been the root cause of companies putting their investment plans on hold, new business drying up and more recently a sharp reduction in hiring intentions. So long as this political intransigence continues, the risk of the economy drifting into recession increases. Even Brexit in the form of PM May’s Withdrawal Agreement will initially see growth suppressed by the need to run down the stockpile of inventories, built up as a precaution against the ‘No Deal’ option.
Global economic growth remains sluggish, dominated by concerns over the health of the Chinese economy and, more pointedly, its overwhelming levels of corporate debt. Hopes of an agreed trade deal with the US are tempered by concerns over who Trump will pick his next fight with, German car manufacturers, for example. With subdued inflation, and some signs of growth stalling, central bankers are, for now, exercising caution; although cutting interest rates is not on the agenda, the European and US central banks are happy to communicate that they will consider allowing monetary conditions to ease if needed.
A pause, if not easing, in monetary policy, and positive outcomes to a couple of geo-political hurdles, could see a resumption of the ‘Goldilocks era’ of slow, but steady, growth accompanied by low/ falling inflation. With cash on the side-lines there’s room for a move higher, but with risks in either direction finely balanced we expect volatility to continue.
How are we currently positioned?
During the month we sold all of our property exposure, switching into cash for the time being. This action was more a precaution against the possible risks associated with a messy Brexit period, rather than an outright bearish view on property.
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.
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.