Investment Comment February 2019

The fourth quarter correction of 2018 significantly eroded the global highs experienced in the third quarter. As illustrated above, global markets were down significantly in local currency terms, led by China and Ireland, declining -25% and -22% respectively. However, January saw significant recovery across global markets.

Emerging Markets and the US recovered well, with the MSCI EM and MSCI USA up +5.3% and +4.7% respectively. Despite the prevailing uncertainty surrounding Brexit, the MSCI UK increased +3.7%, with the MSCI EU not far behind at +3% on the month. Asian markets recovered a little ground from their 2018 decline, with the MSCI Asia and MSCI Japan up +3.4% and +2.7% respectively.

Despite strong labour market data, the Federal Reserve decided to keep US interest rates unchanged in January. Unemployment remained low at 4% and average earnings increased by 3.2% year-on-year. Chairman Jerome Powell highlighted risks to global growth, heightened political uncertainty and the recent US government shutdown amongst the primary drivers behind the decision. The US government shutdown, initiated by President Trump, has been suspended for three weeks to open parts of the government. Economists propose that the shutdown, which lasted for 35 days, will wipe out $8bn of economic activity in the first quarter, which is estimated to shed -0.2% off real GDP growth for the quarter. However, 2019 growth expectations for the US remain strong at +2.5%. Markets also seem to be pricing in zero interest rate hikes for 2019 after the Fed vowed to be patient with interest rate decisions. The US market focus has now shifted to trade negotiations with China.

In the UK, Brexit negotiations continue, with Theresa May returning to Brussels to renegotiate the Irish backstop despite signals from the EU that they will not vote for changes to the existing withdrawal agreement.  In this regard, German economists suggest that the EU needs to show more flexibility over its stance on Brexit and “abandon its indivisibility dogma”, as a disastrous showdown “would cause irreparable political as well as economic damage”.

Despite the Brexit-related uncertainties, the outlook for the UK is positive, with the IMF keeping their growth forecast for the UK at 1.5% in 2019.  The UK labour market remains robust, with employment recording its highest level on record at the end of 2018.  Average weekly earnings increased 3.3% year-on-year in the three months to November last year and unemployment returned to its previous low of 4%.  With the UK inflation rate at a two-year low of 2.1%, real wages grew by 1.2%.

The outlook for the EU remains positive but relatively less optimistic. Germany entered contraction territory for the first time in over four years whilst the downturn in Italy gathered pace.  In this regard, Germany revised its 2019 growth expectation to 1%, down from 1.5% in 2018, due to fears of a disorderly Brexit as well as the ongoing trade war between the US and China. Further concerns surrounding the Eurozone relate to the Italian economy, which contracted for the second consecutive quarter, signalling a lack of sustained confidence to boost growth. France and Spain, in contrast, expanded faster than expected, with GDP growth of 0.3% and 0.7% in the three months to December respectively. Economic fundamentals for the area remain positive with the unemployment rate at 7.9%, the lowest in a decade, and an inflation rate within the area of 1.7%. Overall growth expectation for the EU is expected to remain between 1% and 1.5% in 2019.

The declining probability of further interest rate hikes in 2019, combined with modest growth expectations in the US, are expected to have favorable consequences for Emerging Markets as a result of a weaker Greenback and lower interest rate risk. A slowdown in China is evident but the Chinese government has hinted at plans to use fiscal policy to maintain growth at current levels. Growth expectations remain unchanged between 5.5% to 6% in 2019. The recent Indian interim budget highlighted the government’s vision to become a hub for artificial intelligence, thereby stimulating local job growth and supporting the creation of a digital India via a national artificial intelligence program. The country is expected to expand by 8% in 2019.

Japanese exports in December fell 3.8% year-on-year, as a consequence of the ongoing trade war between China and the US, which the Japanese government proposes as amongst the primary threats to a strengthening economy. The Japanese economy counted its 74th consecutive month of improvement since December 2012 under Prime Minister Shinzo Abe but consumers have yet to feel the benefits as wage gains remain tepid. Growth expectations for the country remain subdued for 2019, ranging between 0.75% and 1.25%.

Oil prices have slowly ticked up over the month, with Brent crude currently priced over $63 a barrel. Supply concerns, as a result of OPEC production curbs and US sanctions on Venezuelan oil, offset forecasts of weaker demand and pushed prices up to a two-month high. Gold prices, which experienced a significant uplift during the fourth quarter correction of 2018, dropped 0.4% to $1,316 per ounce, as risk-aversion waned amid some signs of progress between the US and China on trade.

Our overall global market outlook remains unchanged as we continue to see attractive opportunities across asset classes. We are not recommending any significant changes in asset allocation decisions at this time but do share the view that the UK market is currently undervalued. Global growth is expected to be positive in 2019, ranging between 2.75% and 3.25%. We continue to communicate to our clients the importance of holding a well-diversified portfolio and taking a long-term view on their investment returns.

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.