The accommodative monetary policy adopted by central banks, potential recovery in Chinese economic expansion and until more recently softer rhetoric regarding the US-China trade negotiations supported markets in the earlier part of 2019.  The outlook changed somewhat in May, with the weakness in stock markets being triggered by the announcement that the US would be increasing tariffs on US imports from China.  Closer to home, the Prime Minister Theresa May’s impending resignation was interpreted by the market as increasing the likelihood of a “no deal” Brexit and paving the way for a general election which could result in a less market-friendly Labour government.

The S&P 500 (US) continues to be the strongest major developed market in 2019, in spite of the uncertainty surrounding US-China trade.  The introduction of further tariffs has the potential to impact the US economy as well as China by hindering growth and increasing inflationary pressures. The concern is that this could result in reduced capital expenditure, leading to job losses and consequently a reduction in consumer confidence.  The minutes of May’s Federal Open Market Committee (FOMC) meeting concluded that whilst inflation is below target, it is expected to be short-term in nature.  This suggests that the Federal Reserve would prefer to maintain interest rates at their current levels and not opt for the reductions expected by market participants.  Recent comments from the Federal Reserve do however suggest that there is scope to reduce rates should stimulus be required due to a less favourable economic outlook.  Although the 10-year economic expansion seen so far is losing pace, the consensus view is that there is no immediate risk of recession.  The S&P 500 produced a +11.60% total return in local currency terms year-to-date (to 3 June 2019).

UK equities continue to be impacted by uncertainty concerning the ongoing Brexit negotiations, now against the backdrop of the Prime Minister’s resignation. Sterling continues to act as a barometer for the state of negotiations and fell 3.28% against the dollar over May, providing a tailwind for those UK listed companies which derive a greater proportion of their revenue from overseas.  In this context, the FTSE 100, which typically includes larger multinational organisations, outperformed the more domestically focused FTSE 250.  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 1 May 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 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 potential 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 and these markets continue to be sensitive to a number of factors, including a slowdown in global growth.

Economic data in the Eurozone has been mixed and growth expectations continue to be influenced by the region’s exposure to China and sensitivity to trade uncertainty.  The ECB has acknowledged the risks posed, resulting in a downward revision of 2019’s GDP estimate, albeit the initial estimate for the first quarter.  GDP did provide a positive surprise with annualised growth of 1.6% over the period.  In addition, the majority of member states have also seen a notable decline in unemployment and higher spending which should support growth moving forward.  The US’ postponement of the discussion regarding global auto tariffs has been a positive and the  results of the European election were supportive for the EU project, with populist parties underperforming expectations. The European Central Bank’s (ECB) guidance on interest rate movements remains unchanged, with no further increases expected until at least the end of 2019.

Market Performance 2019 Year to Date Returns
FTSE All-Share +8.97%
FTSE World ex-UK +10.67%
FTSE Actuaries UK Conventional Gilt All Stocks +4.57%
FTSE Actuaries UK Index-Linked All Stocks +8.78%


Performance to 3 June 2019

Key Rates  
Bank of England Base Rate 0.75%
Inflation (Retail Prices Index)* 3.00%


*May 2019