Capital Markets Update

• In a nutshell
• Trade war escalates (again!)
• Deal or no-deal?
• US economic data mixed

In a nutshell

Equity markets showed signs of stress in August, driven by the oh-so familiar story of renewed trade war tensions and concerns over a wider economic downturn. Investors retreated into safe haven assets like sovereign bonds and investment grade credit, sending yields sliding once again. It’s worth noting for example that in Germany, all government debt now trades at a negative yield.

Trade war escalates (again!)

The first day of August saw President Trump tweet that he planned to impose a 10% tariff on the outstanding USD 300 billion of Chinese imports currently not on the tariff list. The announcement took investors by surprise given the ceasefire brokered at the G20 earlier in the year. Three weeks later, China retaliated with a fresh salvo of tariffs on approximately USD 75 billion US imports made up of agricultural goods, cars and crude oil. Trump responded by upping the ante again, tweeting that existing and planned tariff rates would increase by 5%. Tensions cooled a little at the end of the month though when Trump said he would delay some of the tariffs on some of the consumer products until December.

Whilst we think that the 2020 US election should put a floor on how bad trade negotiations can get (as Trump can’t afford a tariff induced recession), we believe that the popularity of China bashing from both sides of Congress and the complex problem of intellectual property rights likely puts a ceiling on how much things can improve. We therefore believe an element of caution is still warranted on this issue.

Deal or no-deal?

Boris Johnson continued to reiterate his position that the UK will be leaving the EU by the 31 October, with or without a deal. At the end of the month, he announced he would be ‘proroguing’ (suspending) Parliament from the 9 September until the 14th October. This move alarmed Brexit opponents, as it would considerably reduce the time for any debate on the matter. On top of this, economic data disappointed, with Q2 GDP falling by 0.2% and the retail sales outlook weakening according to the CBI’s August survey. Not surprisingly, GBP Sterling was volatile throughout this period and gilt yields continued to tumble.

Whilst we believe the probability of a no deal crash out remains an unlikely outcome given the current Parliamentary opposition, we recognise that the odds of an accidental crash out have increased. We therefore continue to believe an element of caution is warranted on the UK equity market (particularly more domestically focused, smaller cap names that are most at risk).

US Economic Data Mixed

In the US, there was evidence that the trade war is taking its toll. The August flash US Manufacturing PMI fell to 49.9, the lowest reading since September 2009. The services side also slid, with the flash Services Business Activity index falling to a three-month low of 50.9, while the University of Michigan Consumer Sentiment Index weakened. On the flip side, the US consumer, the engine of the global economy, still looks resilient, with retail sales rising 0.7% in July. The Federal Reserve cut interest rates in August, and it is hoped that further central bank easing should stimulate a rebound in manufacturing activity. In Europe, whilst data showed that Germany is now flirting with recession, the latest release of the flash composite PMI for the Eurozone showed that growth stabilized in August while the services sector remains robust.

Multi manager team views

We are encouraged by the resilience of the US consumer, and think it is more likely we are going through a patch of slowing growth rather than a protracted slowdown. In addition, it looks like central banks globally are prepared to use their monetary firepower to keep the global economy afloat. However, we are conscious that there remain key risks that could lead to the bear case, including a severe escalation in the trade war, wage growth crimping US corporate margins and a failure of central banks to accommodate appropriately.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.