Your Autumn Newsletter 2019

Market Overview


The third quarter of 2019 saw global markets continuing to face the ongoing challenges that have been present for much of the year. Unsurprisingly, the lack of progress seen in resolving the US China trade war and concluding the Brexit fiasco ultimately led to softer returns compared with those we enjoyed in the first two quarters of the year.


Ongoing disputes dominate

July saw trade talks reopen between the US and China following a three-month hiatus. But hopes of a swift resolution, or at least any form of progress, were swiftly dashed with so-called negotiations turning into insult slinging on President Trump’s preferred social media platform.

At the end of July, the US Federal Reserve delivered the first interest rate cut in the US since the global financial crisis more than ten years ago. The persistent trade uncertainty and global economic challenges led to the decision which did not come as a complete surprise to markets, with greater focus placed on the tone and language used by Fed Chairman Jerome Powell over how many further cuts we could see going forward. September would see a further cut of 0.25% from the Fed, with further cuts expected at the time of writing.

Despite Trump’s rhetoric, the Fed has stuck with its own language including a statement that the policy committee “will act as appropriate to sustain the expansion”. On this point, Powell’s comments that the 0.25% cut was a ‘mid-cycle adjustment’, and not necessarily the beginning of a more prolonged rate cutting programme, wasn’t quite what the market, was hoping for.

The end of the quarter saw broadly stable returns from the US, with the cuts in interest rates buoying the housing market. To date, the talks of impeachment are having little effect on markets, although this could escalate quickly with volatile reactions across markets.


Brexit rumbles on

Closer to home, the political polls in the UK were proved right, and Boris Johnson took office as the new leader of the Conservative Party and therefore Prime Minister of the UK.

The initial market reactions to Mr Johnson’s leadership were cautious due to the increased risk of the UK leaving the EU without a deal, which is widely expected to result in an initial negative reaction from UK stock markets. The supposed risk increase continued to apply downward pressure on sterling against other major developed market currencies, but this downward trend has acted as something of a support for UK shares.

As the days and weeks passed after he took leadership, there was a distinct lack of progress in negotiations, and uncertainty still remained over which direction Brexit would take. This resulted in opposition MPs agreeing a strategy to block a potential no-deal Brexit that quickly dominated the headlines.

The Prime Minister’s decision to then suspend Parliament caused widespread outrage but resulted in a subdued reaction from the market and sterling. However, by the end of the month and the Supreme Court ruling the suspension ‘unlawful’ resulted in a rally in sterling due to the lessened prospect of a no-deal outcome. At the end of the quarter, UK inflation came in at 1.7%, the lowest level in three years. Our researchers view is, the cause of the drop in inflation is down to many businesses delaying increases in the costs of their goods and services ahead of a Brexit resolution.

When analysing the UK markets, deciphering genuinely important developments around Brexit continues to be a challenge. As such, our investment partners have not positioned portfolios to benefit from a particular outcome.


Europe stays steady

In Europe, concerns over the health of many European economies and a contraction in manufacturing data have continued to act as a headwind for returns. This has resulted in broadly flat performance from this region over the quarter.

Europe is also feeling the impact of the US-China trade war, but certain parts of the region have managed to remain resilient. An apparent resolution on political issues in Italy, has helped to stabilise returns, and additional central bank stimulus promised by the outgoing boss Mario Draghi, offered further support to the area. 

Analysts anticipate modest 2019 growth figures however, the slower growth in the broader economy means viewing cautiously about investment allocation in this region. 


Japan outperforms

Japanese equities delivered notable outperformance against other developed market indices. Early August did see the region suffer at the hands of additional tariffs being levied on China. However, the confirmation of further cuts in US interest rates, as well as an expectation of monetary stimulus from the Bank of Japan, helped to push Japanese markets to their highest point so far this year.

Japanese equities suffered through the first half of 2019 due to the strengthening of the yen, but the weakening of the currency seen toward the end of the quarter further helped to support returns.

Ongoing tensions in Hong Kong have also affected sentiment in the region, particularly during August. As there is also no immediate end in sight for the city’s protests, this could be a challenge to the area moving forward. 

Emerging markets tend to underperform in times of uncertainty due to the generally riskier attributes associated with investing in the area and this has been the case. 


Some things to watch

As a positive, a backdrop of falling interest rates in the US, leading to a relative softening of the US dollar, bodes well for emerging market economies. Notable progress in trade negotiations could see an attractive upward re-rating in stock prices. 

Despite this potential for upside, our investment partners remain cautious view on their view of the region keeping exposure in portfolios limited.