Capital Markets Update

• In a nutshell
• Trade war eases (again!)
• UK Government goes ‘prorogue’
• Economic data remains patchy
• Central banks remain supportive

In a nutshell

Equity markets rallied in September, driven by easing trade war tensions, and further central bank monetary stimulus. Within equity markets, there was quite a sharp rotation from expensive growth stocks into cheaper, more unloved value stocks. Bond yields bounced from record lows, before tailing off at the end of the month due to worse economic data than hoped. GBP Sterling fell amidst continued pessimism that a deal would be struck between the British government and the EU, which provided a small boost to overseas assets returns.

Trade war eases (again!)

The familiar pattern of rising tensions followed by de-escalation continued in the US-China trade war. The start of the month saw both sides implement $200bn~ tariffs on imports of each other’s goods. Days later, China and the US agreed to hold further trade talks in Washington DC at the start of October. And throughout the month there were various gestures of goodwill from both sides, including some tariff delays and tariff exemption lists announced.

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.

UK Government goes ‘prorogue’

The Brexit saga continues to dominate UK headlines, and September provided no shortage of material. At the start of the month, hours before Parliament was to be suspended (/“pro-rogued”) MPs passed legislation in the form of the ‘Benn Act’, to ensure the Prime Minister seek an extension with the EU if a deal is not reached. Weeks later, the Supreme Court ruled that the pro-rogation of Parliament by the Government was unlawful. Parliament is now sitting again, however the government is no closer to reaching a deal with the EU.

We are encouraged to see the UK Parliament enact legislation to reduce the likelihood of a ‘no deal’ outcome at the end of October. However, we are still skeptical that a deal can be reached in the short term and think it will likely take a general election to break the impasse, the result of which is very hard to forecast. 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).

Economic data remains patchy

The picture remains that global manufacturing is weak. The US ISM Manufacturing report for August missed expectations and suggests contraction. The flash manufacturing PMIs for the UK, Eurozone and Japan all pointed to declining output. Export focused Germany now looks like it is in a technical recession. Up until now the services data had remained resilient, however cracks appeared in Eurozone data as the flash Eurozone Services PMI missed expectations. However, it is worth noting that the picture is not all bleak. Looking closer at the components of the ISM US Manufacturing data, the new orders component showed signs of stabilisation. Both the US Services and Manufacturing PMI beat expectations, contrary to the picture painted by the ISM report. The US consumer remains healthy, with US retail sales improving in August, backed by rising wage growth and falling unemployment.

Central banks remain supportive

The Federal Reserve cut interest rates by a further 0.25% to stimulate the economy. However, the Federal Reserve Open Market Committee (FOMC) remain very divided on the near-term future direction of interest rates, highlighting the uncertainty of the macroeconomic picture. In Europe, the outgoing president of the European Central Bank (ECB) Mario Draghi left something of a parting gift in the form of further quantitative easing.

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. 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.