After a difficult summer, investors’ confidence returned with markets stabilising although a run of weak economic data has seen renewed pressure recently. Further monetary easing from central banks continues to be applied to offset this. In the US, the Federal Reserve cut interest rates once again in an attempt to prolong the economic cycle and limit the impact of any downturn. The US economy continues to see employment growth although at a slower pace, consumer confidence and manufacturing data has weakened.
In Europe, the European Central Bank (ECB) responded to the poorer economic outlook with cuts in interest rates into negative territory and recommencing quantitative easing in an attempt to provide stimulus and combat deflation. Relatively high reliance on exports has made Europe vulnerable to a slowdown in global trade and the impact of US/China trade tensions. The manufacturing sector is particularly vulnerable as evidenced by poor data from Germany and a slight contraction in economic growth in the third quarter.
The UK continues to be affected by continued wrangling over Brexit with Parliament passing legislation that will force the Government to ask for an extension if it cannot agree a deal with the EU to leave on 31 October. The uncertainty is reflected by movements in sterling with any prospect of an orderly exit or extension being taken as a positive. Although many large UK businesses derive the majority of their earnings overseas, market returns generally lagged other overseas markets with the Brexit situation having some impact on investor confidence. Nevertheless the UK economy has been resilient with low unemployment and above inflation wage growth.
The US/China trade war continues to play a prominent role in the concerns impacting upon markets. As things stand, further tariffs are due to be in place by the end of the year unless talks between the US and China make sufficient progress. An escalation would be expected to hurt the global economy with significant effects being felt in Europe and Japan, another economy vulnerable to slow global growth. China’s economy has continued to show signs of slower growth with the manufacturing and retail sectors impacted. Economic growth remains comfortably ahead of the US and the rest of the developed world and it is not by any means clear that China will feel it needs to concede to US demands on trade.
Central bank easing of monetary policy and the concerns over global economic growth prospects provided favourable conditions for bond markets in particular government bonds where the safe haven qualities are valued by investors. Inflation linked government bonds also performed strongly with high demand from institutions and the protection against a future upturn in inflation providing support.
The global economy faces a number of unpredictable challenges including whether trade tensions will escalate, the health of the European economy if economic growth rates continue to decline and the various scenarios for the UK including the likelihood of a general election.
Although monetary policy may help to avert any significant downturn, heightened uncertainties mean that a diversified portfolio focussing on high quality assets including alternatives such as infrastructure and flexible investment funds able to take measures to protect value remains appropriate.
|Market Performance||2019 Year to Date Returns (GBP)|
|FTSE World ex-UK||+20.61%|
|FTSE Actuaries UK Conventional Gilt All Stocks||+11.88%|
|FTSE Actuaries UK Index-Linked All Stocks||+17.33%|
Performance to 4 October 2019
|Bank of England Base Rate||0.75%|
|Inflation (Retail Prices Index)*||2.60%|