Six months to end August 2019
After a strong recovery in global equity markets in the first quarter of the year, investor confidence weakened in May before a more positive tone emerged at the end of the period. Mounting evidence that the trade dispute between the United States and China has impacted on global economic growth led the US Federal Reserve to cut interest rates at the end of July. Whilst making clear this is not the first in a series of cuts, officials in the US stand ready to ease policy further if required. Inflation remains subdued across the developed world and a number of other Central Banks are looking to stimulate their economies if required. The recovery in Overseas Equity markets (+15.0%) was boosted by the weakness of the UK Pound, but UK Equities (+7.9%) also made good progress despite the continuing saga of the Brexit process. Elsewhere, Fixed Interest investments (+4.8%) continued to rally as investors took account of future interest rate cuts.
The fractious trade negotiations between China and the United States have started to impact on the US economy to a greater extent than commentators had been expecting. However, despite the historically low level of unemployment, there appears to be little sign of inflationary pressures which leaves policymakers free to ease interest rates. At the same time, the reversal of Quantitative Easing is almost complete with this phase of the process ending in September, which may have a greater effect than the recent interest rate cut. Investors expect that easier monetary policy will result in an improvement in company earnings and they are, therefore, willing to ignore poor short-term results allowing US equity markets to reach all-time highs.
European manufacturing and services indices have continued to weaken in recent months making it very unlikely that the ECB’s target for inflation will be met. The German economy is close to recession and many other European economies are struggling despite exceptionally low interest rates raising the possibility that Quantitative Easing will be reintroduced. The nomination of Christine Lagarde, currently head of the International Monetary Fund, to replace Mario Draghi as President of the European Central Bank (ECB) has been widely welcomed but the new President will have much to do to restore a balanced economy across such a diverse region.
The news in the UK has been dominated by the lack of progress on passing the Brexit bill and the inevitable departure of the incumbent Conservative party leader. Economic growth has weakened after the boost from stockpiling in the first quarter but as the prospect of a ‘no deal Brexit’ has increased Sterling has moved back down to its lows against both the Euro and the US Dollar. The UK stockmarket continues to be shunned by international investors and, despite attractive company valuations, it is unlikely that this will change in the near future. It is interesting to note that the number of bids for UK companies from overseas competitors has started to rise as this value starts to be recognised by executives.
Asia & Emerging Markets
Prospects for the Asian region are dominated by the US trade negotiations with China but there are potential beneficiaries from this dispute. Vietnam and Cambodia are likely to benefit from the movement of low-cost manufacturing away from China whilst India looks likely to win high technology jobs and it is notable that Apple have already shifted part of their manufacturing to India which has a large, young, well-educated population. India has recently seen Narendra Modi re-elected as Prime Minister who, although a controversial figure, is likely to implement policies which will lead to an improvement in business conditions.
The global economy has been slowing for most of the year but investors remain willing to look ‘across the valley’ to improving conditions later this year when the first effects of easier monetary conditions will be felt while, with little evidence of inflation around the world, policy makers are free to maintain economic growth as they see fit. Whilst these actions may cause problems in later years, for instance through a build-up in debt, at present we continue in our overall preference for equities over bonds for longer term investment.
Murray Asset Management UK Ltd August 2019
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*Based on the representative indices.