Political policy continues to dominate
The equity market recovery continued in February, though gains were more subdued relative to the sharp relief rally enjoyed in January. The dominant drivers of equity market performance remain the policy actions and intentions from the US and Chinese leadership; not UK domestic politics.
The US & China
- In the US the Federal Reserve reaffirmed its commitment to taking a pause on raising interest rates. Indeed, they appear be going one step further by ending their current strategy of quantitative tightening.
- Quantitative tightening is the reversal of quantitative easing, in that it is the process by which the Federal Reserve sells government bonds, on its balance sheet, back into the market. This reduced supply of bonds places upward pressure on prices and downward pressure on yields and interest rates.
- This combination of policies i.e. pausing on both interest rate hikes and quantitative tightening, eases financial conditions for businesses and consumers and, in so doing, further extends the window in which the economic expansion can continue.
An investment manager perspective:
- There is increasing evidence the Chinese leadership has become more growth friendly too. Data in February revealed a sharp tick up in the delivery of credit to the economy. As is well understood, banks are considered a tool through which governments can execute policy. This surge in lending, therefore, likely reflects a more ‘pro-growth’ agenda.
- The more generous setting from the banking sector accompanies a host of other Chinese policies aimed at stabilising growth, such as tax cuts and accelerated local government infrastructure spending.
- With policymakers of the two largest economies on the planet turning more accommodative, recessionary risks for the year ahead are looking increasingly remote. This is a solid platform from which equities can perform.
- Adding a further boost to investor sentiment has been the apparent progress on US-China trade negotiations. Though a grand bargain has failed to be reached, the extension to the current rapprochement, suggests both parties are keen to avoid a breakdown in talks.
- The stage is seemingly set for a better outcome for both global growth and equities relative to downbeat expectations. As a result, most fund managers we are engaging with are retaining an overweight position in equities.
- Such is the maturity of this cycle, and the fundamental strength of the US economy, however, that policy makers may well resume interest rate hikes over the summer/autumn months.
- The final week of February was scheduled to be a pivotal period in determining the government’s Brexit strategy. The ‘can’, however, has again been kicked down the road; this time to March. A further extension to the end of June is increasingly likely.
- The avoidance of a ‘No deal’ remains fund managers highest conviction call in relation to the whole Brexit saga. In order to forecast the ultimate UK-EU relationship, however, we would need to see greater cooperation from Parliamentarians; such cohesion seems a distant prospect.