Commentary on October 2019

Market Overview

Global stocks had a strong October, climbing above July’s record high. The Global Index returned 2.8% in US dollar terms, propelled by a further interest rate cut in the United States and optimism that the US and China would reach a trade deal. Most stock-markets made decent gains, with the broad US index hitting a new high, but the stronger pound translated these into losses of 1-3% in sterling terms. UK shares and bonds fell by a similar amount.

For much of October it looked as though Boris Johnson would deliver on his pledge to take the UK out of Europe but, after failing to gain instant approval for his deal, the Prime Minister preferred to take his chances in a General Election, rather than have it scrutinised and debated in parliament.

US-China trade talks returned from the brink (again) with the US suspending some tariffs and China offering to increase its agricultural purchases. Both sides expressed optimism at signing-off Phase 1 of the deal in November, though the original summit in Chile was cancelled due to rioting.

The US Federal Reserve (Fed’) cut interest rates by a further 0.25%, as expected, but made it pretty clear that they would now pause unless conditions deteriorated markedly. The bond market is no longer discounting a December rate cut. The Fed’ injected money into the bond repurchase market but insisted that this was in no way a re-introduction of quantitative easing (QE). Mario Draghi stepped down from the post of President of the European Central Bank; his leaving speech ironically warned of “..mild signs of over-stretched valuations in markets” (caused by the excesses of central bank monetary stimulus!).

A relatively positive start to the third-quarter earnings season, and some signs of stabilizing business activity, encouraged investors and left some questioning why the US Fed’ had felt it necessary to cut rates further. Someone not in this group was President Trump who continued to Tweet about the Fed’s incompetence in not cutting to levels similar to those in Europe. US earnings looked set to show a decline in the third quarter but around 75% of companies have so far beaten expectations. Economic activity data continued to signal stagnant to falling growth across much of the world, though activity levels were no worse than during September.

 

Our Views

Investment markets are showing a willingness to move higher on better news; the past month witnessed strong rallies on signs of positive outcomes to the ongoing Brexit debacle and Phase 1 of the US-China trade talks. The question is whether sentiment has been sufficiently negative that a dearth of bad news sees money trickling back into assets and if this is sustainable at a time when future growth remains questionable.

A cynic might say that so long as President Trump holds off on an agreement with China then equities will continue to rally on hopes of a deal; ongoing optimism that a deal would be signed in November spurred US stock-markets to record highs, and this is only Phase 1! Expectations are high for some form of agreement, if only because all the really tricky bits have been pushed into Phase 2.

In the UK domestically focused shares showed strong gains, having lagged the market for a considerable period, in favour of companies with overseas earnings. In the near term some of this move was reversed as an imminent Brexit deal was replaced by another general election, but it afforded a glimpse of the pent-up demand for this area of the market on a satisfactory outcome.

We remain of the view that a definitive outcome to Brexit, genuine progress in trade talks or signs of governments taking up the baton with fiscal stimulus packages will spur markets, but in the near-term the same issues remain unresolved and the UK has the additional uncertainty of a general election to contend with. We expect a period of increased volatility into the year-end.

How are we currently positioned?

The winding up of the Woodford Equity Income fund was announced, with proceeds being returned to clients; the first instalment is anticipated in January with subsequent payments once the unquoted shares are sold.

The stronger pound helped our Japanese funds which are hedged back into sterling; they outperformed those priced in Japanese yen by over 5%.

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.