MARKET COMMENTARY – NOVEMBER 2019

Signs of easing geopolitical tensions in October were well received by investors and in this context equities outperformed their perceived safe haven counterparts, including government bonds and gold.  Progress has seemingly been made as the US and China moved closer to agreeing a partial deal on trade.  In the UK, Boris Johnson was able to agree a new Brexit deal with the European Union (EU). Global monetary policy remains supportive with the US Federal Reserve having cut interest rates by 0.25% for the third time this year.

The S&P 500 (US) started November at an all-time high against a backdrop of accommodative monetary policy, easing geopolitical issues and robust company earnings.  Data out of the US does however suggest that the pace of economic growth is slowing, the weakness in figures is more prevalent in the manufacturing sector, which is more sensitive to trade issues.  Employment growth continues, albeit at a slower pace, but GDP remains positive and above expectations against recent economic forecasts.

Europe’s sensitivity to the ongoing US/China trade impasse has been demonstrated in recent months and the impact has weighed quite heavily, particularly in Germany, where there is a greater dependence on international trade.  Business confidence did improve very modestly, although it seems that manufacturing weakness is beginning to feed through into the labour and consumer markets.  Employment is growing at the slowest pace since December 2014 and consumer confidence has fallen.  Former IMF (International Monetary Fund) head, Christine Lagarde, has now taken over Mario Draghi’s role as European Central Bank (ECB) president.  Interest rates remain at -0.5% and the programme of quantitative easing is scheduled to continue until the ECB inflation target is achieved.

To the markets’ surprise, a new Brexit deal was agreed with the EU– the deal only being possible after the Prime Minister’s agreement to place a customs border in the Irish Sea and also that Northern Ireland would remain more closely tied with the EU than Great Britain.  The deal has support although Parliament ruled out rushing to pass the legislation before the 31 October deadline, an extension was therefore agreed to 31 January.  A general election is due to be held on 12 December as the Prime Minister looks for a parliamentary majority to pass the new deal.  Given the progress made and a reduced likelihood of a no deal exit from the EU, sterling strengthened notably against both the dollar and euro.  This meant that the FTSE All-Share was one of the weaker performing markets with a greater proportion of the constituents included deriving a higher level of earnings from abroad. In terms of the economic outlook, Brexit uncertainty unsurprisingly continues to have an impact.  Employment and consumer confidence have fallen modestly and should clarity not be provided for households and businesses in the medium term, a reduction in interest rates could be possible.

Chinese economic growth is slowing, impacting Chinese demand for external goods and consequently the markets from which they import including the US, Europe and certain emerging markets.  The consensus seems to be that a complete resolution to the trade impasse is not expected at this point given the upcoming US election and the possible resurgence of anti-China rhetoric coupled with both sides’ ambitions to be the number one player on the global technology stage.  Elsewhere, among the Latin American emerging markets such as Brazil and Mexico, the recent cut in US interest rates has helped ease pressure and this has been reflected in the positive performance of stock markets.

In the context of a slowing global economy and political uncertainty an increased focus on assets of a more defensive nature may prove prudent in order to provide some protection should conditions deteriorate.  Within the equity element of portfolios large businesses with high quality earnings typically demonstrate greater resilience to adverse market conditions.  Within fixed interest, allocations to inflation-linked and non-inflation linked government bonds could add greater protection, whilst alternative lesser correlated strategies such as hedge funds and infrastructure should also be considered.

Performance to 4 November 2019

* October 2019