Investment Comment October 2019

Markets proved resilient in September, offsetting some of the weakness experienced over the summer. However, the OECD’s cut to global growth forecasts from 3.2% to 2.9% for 2019 did little to alleviate concerns over a global slowdown. Geopolitical anxieties returned to markets in the form of an oil price spike, brought on by drone and missile strikes on Saudi Aramco oil facilities, which impacted supply.

UK equities appreciated +3.0% on the month. Sterling also ticked up against other major currencies, after the Supreme Court’s ruling about the Prime Minister’s suspension of Parliament. The ruling means that the Benn Act is back in focus requiring the UK Government to seek a Brexit extension by October 19, should it fail to secure a new agreeable deal.

In sterling terms, the US equity market was flat on the month. This was despite the flash manufacturing PMI pointing to a modest rebound in business conditions, aided by a faster pace of growth in output and new orders. In addition, an initial trade agreement with Japan helped to ease some protectionist concerns. The full details of the agreement have yet to be released but are expected to reduce the barriers to a variety of products exported to Japan. Some commentators have argued that the deal could also give the US a stronger position going into the next round of trade negotiations with China. Diminishing protectionist fears saw the price of gold, perceived as a safe-haven asset, sink to a two-month low. The US Federal Reserve continued its programme of monetary easing, cutting interest rates by 0.25% for the second time in 2019. Markets have not dismissed the likelihood of a further cut before 2020. Moderate Q2 GDP growth in the US of +2.0% was widely expected and inflation remains below the Fed target of 2.0%.

Europe ex-UK equities returned a modest +1.1% on the month in sterling terms but European economic data was mixed. Preliminary manufacturing PMIs continue to indicate a contraction for the sector, with the lowest reading since July 2012. Service PMIs slowed in August but still signalled expansion. Business lending data however grew at its fastest pace in a decade. Recession fears eased following the announcement of unemployment figures, showing a drop in September to 7.4%, the lowest level since May 2008. Notably, Germany employed 10,000 more people in September than August suggesting that, despite the export led trading bloc bearing the brunt of the recent trade war woes, labour market demand remains robust.

September also saw a 0.10% cut to the ECB deposit rate to -0.5% as well as an open-ended €20 billion a month quantitative easing programme. The announcement was accompanied by an acknowledgment from President Draghi – and many commentators – that there may now be a limit to the efficacy of monetary policy in the eurozone. The consensus view is increasingly that fiscal stimulus will also be required in order to reach the ECB’s 2% inflation target. Fiscal stimulus announcements in recent weeks in Sweden, Germany, France and the Netherlands, following Draghi’s speech, suggest that governments are not content with a “prolonged sag” in the economy.

The Japanese equity market was particularly strong in September, returning +5.9% in local currency. However, in sterling terms returns were more modest, increasing +2.8%. Economic data indicated subdued consumer confidence, while consumer price inflation fell to a two-year low and exports fell for the ninth straight month. Manufacturing PMI data for September indicated a contraction but focus is now directed at the possible impact of the sales tax hike, from 8% to 10%, in October, which could materially impact the little growth there is in the country. The hike is projected to generate $46 billion a year in extra tax receipts, with the funds earmarked for social welfare programmes and public debt reduction. The last consumption tax rise from 5% to 8% in 2014 caused Japan to slip into recession. However, this time economists believe the rebate plan in place for electronic payments, as part of the tax change, and economic stimulus materialising from the Rugby World Cup and next year’s Olympics, should help offset most of the consumption reduction caused by the increase. Nevertheless, the Japanese government still anticipates that the initiative will reduce economic growth by four-tenths of a percentage point. This is not insignificant given the Japanese economy grew at an annualised rate of only 1.3% in the second quarter.

Emerging Market equity performance was less impressive at just +0.7% for the month. The OECD revised down its projections for Chinese GDP growth for 2019 and 2020, albeit marginally, to 6.1% and 5.7%, respectively. China’s privately conducted General Manufacturing PMI however did unexpectedly rise to a reading not seen since the start of 2018. On the China-US trade situation, there was a more conciliatory tone from both parties, with any tangible developments in negotiations expected to support markets.

Despite macro indicators continuing in aggregate to point to a global slowdown, markets have remained resilient. With inflation subdued, particularly in larger economies, monetary and fiscal stimulus is expected to support equity markets. We currently do not see a compelling reason to materially adjust our asset allocation strategy but continue to advise our clients on the importance of holding a diversified portfolio and taking a long-term investment view.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.