August was an eventful month for financial markets, beginning with an announcement from President Trump of the intention to impose a 10% tariff on the remaining $300bn of Chinese good which were not previously subject.  China retaliated with an increase of tariffs on US imports including agricultural goods, cars and crude oil.  Markets were taken aback given the decision to suspend any further increases at the G20 meeting in May.  To counter the risk of an economic slowdown the Federal Reserve (Fed) reduced the headline rate to 2.25% at the end of July and the market expects further cuts and central banks around the world to move to looser policy.

In the UK, Boris Johnson committed to leave the EU by the 31 October, regardless of whether there is a deal in place or not.  The announcement of the intention to suspend parliament sent sterling to a year low against the US dollar and euro as the currency continues to act as a barometer for the perceived state of negotiations.  Parliament looks set to thwart his strategy however and a general election now looks probable in an attempt to resolve the impasse.

The US remains as the strongest developed market, returning +23.89% (S&P 500) year to date for sterling investors to 5 September 2019.  News flow has been dominated by concerns with regards to the inversion of the US 10-Year Treasury yield curve which has historically preceded a recession.  Economic fundamentals do however remain broadly supportive and the consensus is that there is no immediate risk.  There has been weakness in manufacturing data although the consumer appears to be resilient; with consumption being of greater importance in terms of US Gross Domestic Product.  The company earnings season is winding down, with a majority of firms having posted positive earnings surprises.  Expectations were however lower to begin with against a backdrop of weakness seen in the final quarter of 2018 where growth estimates were revised.  The Federal Reserve Chairman’s speech of 23 August was broadly in line with market expectations and further monetary policy stimulus is expected, with the potential for further rate cut in September and the possibility of one more in either October or December.

In the UK, Brexit continues to weigh on investor sentiment and second quarter GDP data showed a modest contraction in economic growth.   With uncertainty over the UK’s relationship with the EU ongoing, the Bank of England Monetary Policy Committee (MPC) meeting on 31 July voted unanimously to maintain the Bank Base Rate at 0.75%.

Emerging markets remain largely in positive territory year to date (to 30 August 2019). This has been driven by the more accommodative monetary policy adopted by central banks globally, a pause in US dollar strength, and some stabilisation in Chinese economic growth after policymakers made use of both monetary and fiscal tools to counterbalance the impact of the trade impasse.  The lack of progress in negotiations remains a source of concern, although should a satisfactory resolution be achieved the outlook should improve and a favourable market response would be expected.

Economic data in the eurozone continues to be generally unimpressive.  The manufacturing sector has weakened further, led by Germany which is on the verge of recession as automobile and industrial goods orders have weakened significantly.  As in the US however, consumer data remains relatively robust supporting the more dominant services side of the eurozone economy. The ECB (European Central Bank) is expected to introduce further stimulus measures this month.

In summary, the more dovish approach to monetary policy taken by central banks and fiscal stimulus from government should continue to provide some support for asset prices.  These measures may not though be sufficient to fully offset the negative impact of the US/China trade dispute however and investors will be looking for signs that stock market valuations continue to be justified.  A well-diversified approach to portfolio construction remains important and in the context of slowing global growth, allocations to more defensive assets such as companies with strong balance sheets, government bonds, infrastructure and absolute return vehicles with less correlation to wider equity markets are likely to provide some stability to portfolios at this stage.

Market Performance 2019 Year to Date Returns (GBP)
FTSE All-Share +11.12%
FTSE World ex-UK +20.28%
FTSE Actuaries UK Conventional Gilt All Stocks +10.67%
FTSE Actuaries UK Index-Linked All Stocks +18.85%


Performance to 2 September 2019

Key Rates  
Bank of England Base Rate 0.75%
Inflation (Retail Prices Index)* 2.80%


 *August 2019