Investment Comment December 2019

Positive sentiment in global markets continued in November. Developed markets again outperformed emerging markets, adding to the notable performance divergence this year.  Perceived safe havens such as sovereign debt, gold and silver weakened, indicating improved appetite for risk in markets. Sterling continued to rally – particularly against the Euro and Yen – helped by opinion polls indicating a likely Conservative majority in the upcoming election.

The MSCI UK was up +1.75% in November, despite a softening in macro data. Both the Manufacturing PMI and Service PMI were marginally down. The preliminary Q3 GDP growth of 1% annualised was 30 bps down on Q2 and the weakest growth rate since Q1 2010. Still, the Bank of England’s Monetary Policy Committee voted by a majority of 7-2 to hold interest rates at 0.75%. They remain open to taking measures in either direction to ensure a return to their 2% inflation target.

The US was the best performing major geography in November, returning +3.69% in sterling terms. With markets now up over 25% year to date, the country is on course for its best calendar year since 2013. The market was buoyed by an improved reading for growth in Q3. Service and manufacturing PMI data were also strong; both nudged further into expansion territory. Although US companies posted broadly flat earnings growth relative to the third quarter last year, 80% of companies beat earnings estimates for the quarter. Japan’s ratification of the US trade deal was welcome news for US farmers who will no longer be disadvantaged relative to their Australian and Canadian competitors. Under the terms of the deal, Japan will cut tariffs on US beef and pork to the same levels as the Trans-Pacific Partnership, one of the trade deals President Trump withdrew the US from upon taking office. Employment indicators were also strong. The unemployment rate dipped back to 3.5% and non-farm pay rolls increased by 266,000, the best month for job gains since January. The renewed positivity in the US economy has analysts forecasting only one rate cut from the Federal Reserve next year.

The MSCI Europe ex-UK gained a healthy +1.46% over the month in sterling terms.  Optimism briefly increased in Germany after it narrowly missed a technical recession in Q3. The country recorded a higher than expected foreign trade surplus in October and manufacturing PMI data for November was significantly improved. However, industrial output reached a new ten-year low in October, falling 5.3% against the same month in 2018. There was however some encouragement for the new ECB President, Christine Lagarde, in the form of an uptick in inflation to 1%.  Lagarde will nevertheless be conducting a ‘strategic review’ into achieving the elusive 2% inflation target and will be announcing the first policy decision of her term on December 12.

Japanese equity markets returned a modest +0.60% in sterling terms. The final reading for Q3 growth was strong, up 1.8% after robust business investment. Some commentators have argued that this figure may be inflated by the retail spending brought forward ahead of the consumption tax hike. Fears over Q4 growth have grown as retail sales fell 14.4% month on month in October. The fall is the worst since the series began in 1992 and has been attributed to the rise in consumption tax which took effect from 1 October but also Typhoon Hagibis. Prime Minister Abe’s announcement of a $121 billion stimulus package should go some way to reverse the effects of the tax rise. The stimulus plan is one of the largest since the 2008-09 financial crisis and targets natural disaster reconstruction and security, an avoidance of an economic slowdown, and a future beyond the Tokyo Olympics.

In sterling terms, Emerging Market equities were down -0.10%. Chinese equities increased on signs of progress in US-China trade talks, although fresh US legislation supporting protesters in Hong Kong tempered market optimism. Although Chinese PMI survey data for November signalled comfortable growth in both sectors, industrial production and retail sales for October slowed more than expected. The announcement of modest fiscal and monetary support measures helped Chinese equity markets post a marginal gain in November. A stronger US dollar was a headwind for a number of regional markets, in particular Latin America. This was not helped by civil unrest in Chile and Colombia and Brazil posting a wider than expected current account deficit.  The relative slowdown in India continued with Q3 growth falling to 4.5%, the lowest level since 2013. This marked the sixth consecutive quarter of decreasing growth which many have attributed to the collapse of the country’s shadow banking sector.

There are certainly reasons to be optimistic in equity markets. Equity valuations have risen this year but remain close to their long-run averages. Credit spreads, which typically widen as economic conditions deteriorate and market uncertainty rises, remain narrow. However, markets have been less concerned by fundamentals and more focused on geo-political shocks this year. Equity market performance for the final month of the year will likely be impacted by a ‘phase one’ US-China trade deal. Given there is still the potential for negotiations to fail and the tariffs to be implemented as scheduled on 15 December, a fair amount of short-term risk still exists.  We therefore continue to advise clients to hold a diversified portfolio and take a long-term approach to investing.

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.