Market Review

Six months to end November 2019

Simon Lloyd - Chief Investment Officer
Simon Lloyd - Chief Investment Officer

Investors remained remarkably resilient over the summer despite declining global economic growth figures. It is clear that the trade dispute between the United States and China has harmed not only the Chinese and US economies but also the economies of Europe and Asia. Inflation remains subdued across the developed world allowing Central Banks to stimulate economic growth. The US Federal Reserve has cut interest rates three times this year, most recently at the end of October, whilst the ECB has restarted Quantitative Easing and China has cut taxes. The rise in Overseas Equity markets (+8.6%) over the past six months occurred towards the end of the period as the US equity market strengthened but UK Equities (+2.7%) were held back by the continuing saga of the Brexit process. Elsewhere, Fixed Interest investments (+2.6%) rallied in response to falling interest rates.

United States
Evidence is growing that the economic slowdown in the United Sates, previously confined to the manufacturing sector, is spreading to consumers, who represent the largest part of the economy. This may be offset to some extent by an improvement in the housing sector but investors at looking to the Federal Reserve to keep cutting interest rates to stimulate economic activity. The headwind from the actions taken to reverse Quantitative Easing has now been removed and this may have a greater effect than the recent interest rate cuts. Investors seem content that this easier monetary policy will result in an improvement in company earnings and any easing of the trade war with China will be taken positively, lending support to the equity market.

Europe
European manufacturing and services indices have continued to weaken in recent months as the effects of the US / China trade war have spread to the global economy. Recent figures show that the German economy has only narrowly avoided a recession and many other European economies are struggling despite exceptionally low interest rates. Mario Draghi’s final act as President of the European Central Bank (ECB), was to re-start Quantitative Easing in Europe, a move seen by many as controversial. Christine Lagarde, the incoming ECB President, will have much to do not only to combat the effects of deflation but also to meet the disparate needs of the various countries in the region.

UK
The inevitable change in leadership of the Conservative Party greatly increased the likelihood of a ‘no deal Brexit’ and in response, Sterling fell to new lows against both the Euro and the US Dollar. After receiving a boost from stockpiling, economic growth has weakened as the uncertainty has sapped both consumer and business confidence. UK domestically oriented shares remain unloved but are very ‘under-owned’ by global investors who are waiting for a measure of clarity before re-entering the market. Whether the General Election result provides this clarity remains to be seen but, should it do so, it is likely that both domestic shares and Sterling will rise.

Asia & Emerging Markets
The Asian region, and Japan in particular, has been significantly affected by the slowing Chinese economy which, in turn, has been exacerbated by the worsening trade dispute with the US. The economies of the region have been labouring under the weight of a strong US Dollar which makes debt more expensive to service and interest rates higher than desired. This relative strength of the Dollar has now started to be less pronounced and consequently conditions have eased for businesses in the region at the same time as prospects have improved for a re-acceleration in global economic growth.

Conclusion
There is little evidence of inflation in the global economy at the present time which allows Central Banks the freedom to respond to the slowdown in growth that has been experienced for most of the past year. Investors have remained relatively sanguine as they wait for the easier monetary policies that are being pursued to take effect. These actions may cause issues in later years through a build-up in debt, but, the meantime, we continue in our overall preference for equities over bonds for longer term investment.

Murray Asset Management UK Ltd December 2019

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*Based on the representative indices.