Six months to end September 2018
So far this year has been marked by a higher level of volatility in share prices than has been seen for some time. Equity markets spent much of the period recovering from falls experienced at the start of the year; and a typically difficult August took some of the gloss off the returns, although further headway was made in September. Against this background, both UK Equities (+6.1%) and Overseas Equities (+11.8%) delivered positive returns. Elsewhere, Fixed Interest investments (-3.0%) fell as investors reappraised the Federal Reserve’s interest rate policy.
After a mixed first quarter, where bad weather and waning confidence in the Brexit negotiations combined to curb activity, confidence recovered over the course of the summer. Low unemployment in many of the world’s key economies, and signs that inflation appeared to be under control, led investors to believe that confidence – both at the corporate and the consumer level – might be able to withstand the challenges in the UK and Europe of the Brexit negotiations, and the often inconsistent, but generally growth-focussed rhetoric of the Trump administration in the US.
Unemployment in the UK is at its lowest level since 1975 and rising wage pressures led to a rise in UK interest rates for only the second time in ten years. It appears that the eventual outcome of the Brexit discussions may be at the ‘softer’ end of the scale, although both London and Brussels still appear to be struggling to achieve any breakthrough agreement.
In Europe, GDP growth appears to have stabilised in recent months in line with the stronger global economy. The European Central Bank is still seeking to support the regional economy via its Quantitative Easing purchases but the level of this support is being reduced. Politics have re-appeared as a source of risk in Europe as a coalition of distinctly anti-EU parties now holds power in Italy and investors there have been alarmed by manifesto plans to introduce government-backed promissory notes, the first steps to a parallel currency. Fears that Italy will withdraw from the Euro, however, have been mitigated by surveys showing that support for the currency in Italy has risen above 60%.
The weaker first quarter in the United States was quickly forgotten as the economy posted an annualised rate of GDP growth of 4% in the second quarter. Although this reflected a number of temporary factors, steady growth is expected for the coming months. Unemployment has fallen to levels last seen in 1969 and the minimum wage has been increased in a number of states. As a result, pockets of wage inflation are starting to appear and, in response, the Federal Reserve raised interest rates by a further 0.25% in June and again in September. Importantly, in September, the reference to an “accommodative” strategy by the Fed was dropped as rates reached 2.25% and Jerome Powell, the Federal Reserve Chairman, indicated that another rate rise is expected before the year end.
The escalating trade war between the US and China, along with the strength of the US Dollar, prompted investors to withdraw funds from Asia and the Emerging Markets. The debate around the true strength of the Chinese economy continues to occupy investors but it is clear that the authorities are cracking down on non-bank lending in order to control excessive debt levels.
Ten years after the Great Financial Crisis, the global economy is gradually passing the point where expansionary policies can be scaled back but how well it will cope with the next stage of the cycle remains unclear. Rising interest rates, aimed at controlling inflationary pressures, are likely to continue to exert downward pressure on bond prices. We are, therefore, continuing in our overall preference for equities over bonds for longer term investment although we have become more cautious in our short term outlook.
Murray Asset Management UK Ltd October 2018
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*Based on the representative indices.