MARKET COMMENTARY – MAY 2019

Global equity markets demonstrated their strength in the first quarter of 2019 and continued to make further gains in April. The catalyst has been the more accommodative monetary policy adopted by central banks, a potential recovery in Chinese economic growth until recently and softer rhetoric regarding the US-China trade negotiations. There were further grounds for optimism after a strong start to the US earnings season with a number of companies exceeding expectations.

The S&P 500 (US) continues to be the strongest major developed market in 2019, in spite of the fears of a near term recession due to the government shutdown and cold weather seen at the start of 2019. US economic data has however remained strong with low unemployment by historical standards and wage growth increasing 3.3% year on year. Growth in wages is not yet perceived to be at a level high enough to warrant concerns about rising inflationary pressure from the Federal Reserve. With core inflation remaining low this is positive for the consumer and should continue to support economic growth. The consensus is that although the 10-year economic seen so far is losing pace, it is not faltering and there is no immediate risk of recession. The S&P 500 produced a +12.79% total return in local currency terms year-to-date (to 8 May 2019).

UK equities continue to be impacted by uncertainty concerning the ongoing Brexit negotiations. Weakness from more economically sensitive areas including banks, tobacco and mining was a feature in the final quarter of 2018, these sectors and the market as a whole have though seen a meaningful rally as concerns over global growth have receded. The UK economy is supported by a strong labour market which has aided in keeping growth positive whilst manufacturing has had a short term boost due to stockpiling, although business confidence is expected to be subdued this year.  With the uncertainties surrounding Brexit negotiations and mixed economic data, the Bank of England Monetary Policy Committee opted not to increase interest rates at their meeting of 20 March 2019.

In 2018 emerging market equities were weighed down by fears of a slowdown in the pace of Chinese economic growth given a number of developing markets’ reliance on Chinese imports. The vulnerability of some economies to tighter US monetary policy is also a concern, as is the potential impact of global trade tensions and more recently higher oil prices, which have been a headwind for net oil importers such as Argentina and Turkey. Conversely, this has been a positive for net exporters such as Iran and Mexico. Developing economies reliant on external funding find the tightening of US monetary policy challenging, consequently the Federal Reserve’s decision in January to leave rates unchanged and the introduction of Chinese stimulus measures has eased pressure supporting a recovery. The US dollar remained relatively strong against the majority of emerging market currencies over the period and aside from this, recent developments are positive although these markets continue to be sensitive to a number of factors, including the slowdown in global growth.

Economic data in the Eurozone has been weaker than expected and growth expectations continue to be influenced by the region’s exposure to China. The ECB has acknowledged the risks posed, resulting in a downward revision of 2019’s GDP estimate, albeit the majority of member states have seen a notable decline in unemployment and higher spending which should support growth moving forward. The European Central Bank (ECB) opted to leave interest rates unchanged at the April meeting, with no further increases expected until at least the end of 2019. Inflation remains stubbornly low, which provides further justification for the ECB to retain accommodative monetary policy until the inflation target is achieved.

Markets have enjoyed a strong start to 2019.  Stronger economic data from China has been a tailwind for risk assets such as equities, whilst looser monetary policy continues to fundamentally support prices. Markets however remain sensitive to political risk and changes in investor sentiment, particularly surrounding the outlook for growth and trade policy, whilst consideration should be given to the late stage of the economic cycle. In light of the political and economic risks faced, a diversified approach and exposure to active management certainly remains appropriate for most investors.

Performance to 8 May 2019

*April 2019

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