Capital Markets Update

• In a nutshell
• Trade talks improve
• Brexit relief
• Economic picture remains mixed
• Central banks remain supportive

In a nutshell

October saw another positive month for equity markets. Risk assets were buoyed by further trade talk progress, continued dovish noises from central banks and the UK narrowly avoiding a no-deal Brexit. The latter drove a relief rally for GBP sterling and UK domestic assets. Within bonds, credit spreads tightened, meaning corporate debt outperformed government debt as interest rates sold off with improving sentiment.

Trade talks improve

President Trump announced a ‘Phase One Trade Deal’, which commits China to buying more US agricultural goods, further liberalising its financial sector and making its currency markets more transparent. This development was the key driver behind the upward move in risk assets in October.

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 continue to 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. An element of caution is still warranted on this issue.

Brexit relief

At the 11th hour Prime Minister Johnson struck an unlikely deal with the European Union (EU). A compromise on the backstop was found, with Johnson agreeing to put a customs border in the Irish Sea and for Northern Ireland to be more closely aligned with the EU, thus preventing a hard border and a violation of the Good Friday agreement. However, Parliament refused to rush through the deal to meet the end of October deadline and Johnson was forced to request an extension until the 31 January. Parliament also voted for an early election, which is to be held in December.

We are encouraged to see that a no-deal Brexit was once again averted in October and this has decreased our pessimism on the UK equity market. As we expected, a general election has been chosen as the method to try to break the current Parliamentary impasse. However, the result of this is highly uncertain and will be crucial to the future direction of the UK economy. In addition, even if the Conservatives win a majority and the deal is passed, the trade deal with the EU is still outstanding, which could pose further problems down the line. We continue to believe an element of caution is warranted on the UK equity market.

Economic picture remains mixed

The picture remains that global manufacturing is weak. The US ISM Manufacturing report for October again pointed to contraction, however it was less bad than October. Concerns grew that the weakness in manufacturing was seeping into the broader global economy. In the US, Eurozone and the UK, job growth slowed, and consumer confidence fell. On the flip side, real GDP growth for the US for Q3 2019 surprised on the upside, indicating that the US economy had now slowed as much as expected. In China, industrial production and retail sales for September showed strong growth. And globally, Services PMIs largely remain expansionary.

Central banks remain supportive

Amidst the slew of mixed economic data, central banks continue to show a willingness to ease financial conditions. The Federal Reserve cut interest rates by 0.25% for a third time this year to stimulate the economy. October marked Mario Draghi’s last month at the helm of the ECB. Investors will be watching his successor Christine Lagarde closely, in the hope of continued easy policy and that she will pressure European governments to loosen fiscal purse strings.

Multi manager team views

We continue to believe that 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. In Europe we would also note that whilst ECB monetary stimulus is welcomed, it must be accompanied by fiscal stimulus also (which is currently not happening), if it is to be effective.

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.