MARKET COMMENTARY – FEBRUARY 2019

Investor sentiment improved significantly in January after a difficult final quarter of 2018. Fears of higher US interest rates, slowing global growth, political uncertainty and trade disputes abated somewhat during early 2019, leading to notable recoveries across most developed and emerging markets.

The S&P 500 (US) has been the strongest major developed market in 2019 to date as investors’ concerns were eased by the Federal Reserve’s signalling of a more patient approach to further interest rate rises this year, in part due to subsiding inflationary pressures. This is in addition to the improved dialogue between the US and China, with the trade dispute “truce” set to be effective until at least 1 March. US economic data continues to be reasonably strong with unemployment remaining low by historical standards and wage growth rising, in conjunction with lower core inflation primarily due to weaker oil prices. This should be positive for the consumer and help drive economic growth. The S&P 500 produced a +6.44% total return in local currency terms year-to-date (to 8 February 2019).

UK equities continue to be impacted by uncertainty concerning ongoing Brexit negotiations. Weakness from more economically sensitive areas including banks, tobacco and mining was a feature of the final quarter of 2018, these sectors and the market as a whole have though seen a meaningful recovery as the prospect of a “no deal” scenario has seemingly receded. A series of votes took place following the rejection of Theresa May’s deal negotiated with the EU, in order to establish a way forward, from which two key points arose. There is a majority in Parliament against a no deal scenario and that a number of MPs may be prepared to support Theresa May should concessions from the EU around the Irish border backstop be achieved.

In 2018 emerging market equities were weighed down by fears of a slowdown in the pace of Chinese economic and credit growth, the vulnerability of some economies to tighter US monetary policy and concerns about the potential impact of global trade tensions. Developing economies reliant on external funding find the tightening of US monetary policy challenging, consequently the Federal Reserve’s decision in December to leave rates unchanged together with the softer rhetoric between the US and China has eased pressure aiding in a partial recovery, bond markets have priced in no further rate rises over 2019. Recent improvements are of course positive although these markets continue to be sensitive to a number of factors, including a potential slowdown in global growth.

European markets have also felt the impact of the trade war concerns and similarly the slowdown in China’s economic growth rate. Confidence in the eurozone remains relatively low although some progress was made as the substantial disruption caused by the “yellow vest” protests in France subsided to a degree. Also on the positive side, the Italian Government’s budget proposal has been accepted by the EU Commission in spite of the scepticism surrounding its fiscal sustainability. Italian GDP did however fall by 0.2% over the previous quarter placing Italy in a technical recession, slowing growth within the Eurozone, including in the powerful German economy, continues to be an important factor.

The European Central Bank (ECB) has kept it’s guidance on monetary policy unchanged, with the programme of quantitative easing having halted at the end of 2018 and interest rate rises expected by the end of 2019, although the market is placing a lower probability on the latter.

Investors began 2018 against a supportive backdrop of synchronised global growth, moving into 2019 the global economy looks less positive. The Federal Reserve’s more dovish stance towards any further rate rises has though eased concerns of a faster than anticipated tightening of monetary policy at a time when global growth is slowing, the markets’ sensitivity to this factor has clearly been demonstrated in the first month of 2019. The softening of rhetoric from the US towards China has also improved investor sentiment.

Markets remain sensitive to political risk and due consideration should be given to the ongoing uncertainties at this late stage of the economic cycle, together with mixed economic data the economic and market outlook is less clear. A diversified approach and exposure to active management certainly remain appropriate for most investors.

Performance to 8 February 2019

January 2019