Investment Comment July 2019

Global markets continued on an upward trajectory in the second quarter of 2019, following the strong recovery in the first three months, with the MSCI All Countries (ex UK) returning +6.2%. Both UK and Emerging Markets performed well, increasing +3.1% and +3.0% respectively. Property gained marginally, up +0.3%, although corporate and overseas debt fared better given the potential for looser monetary policy across the globe.

In the US, retail sales increased in May and sales for the prior month were revised higher, suggesting a pick-up in consumer spending which eased fears of a rapidly slowing economy in the second quarter.  Compared to May last year, retail sales advanced 3.2%.  The solid gains in core retail sales in April and May suggested consumer spending was gaining momentum in Q2 after a weak Q1.  One might have expected to see economists raising their Q2 GDP growth estimates, which are currently below a 2.0% annualised rate.  However, growing trade tensions and weak inflation data have caught the attention of the Federal Reserve, which signalled potential interest rate cuts starting as early as this July.  CPI inflation recorded an incremental increase, up +0.1% in May after gaining +0.3% in April. Year-on-year, CPI in the twelve months to May was recorded at +1.8%, slowing from +1.9% year-on-year in April.  Even with benchmark interest rates remaining unchanged, there has been a clear shift in sentiment since the last policy meeting, with economic projections indicating that half of the policymakers are now willing to lower borrowing costs over the next six months.  Purchase Managers Index (PMI) data indicated continued growth albeit with declining momentum.

The Bank of England was also in a dovish mood in June, keeping interest rates unchanged at 0.75%, although hinting that it might make sense to raise rates over the next couple of years should the Brexit transition go smoothly.  In the meantime, however, the Bank lowered its growth forecast for Q2 from +0.4% to 0.0%, highlighting concerns of lower expected wage growth and subdued inflation, the latter of which declined from 1.8% in April to 1.7% in May (both year-on-year).  Brexit-related stockpiling, which is believed to have bolstered annualised GDP growth in Q1, will likely have the opposite effect on Q2 growth.  British car production saw a significant decline in May, the largest since the global financial crisis of 2008, as factories shut down for a Brexit that never came.  In this regard, Conservative leadership candidate Boris Johnson insists that he will get a ‘no-deal’ Brexit through Parliament if necessary.  During his visit to the UK, US President Donald Trump mentioned that the UK’s departure from the EU would pave the way for a ‘phenomenal’ trade deal between the UK and US.

The President of the European Central Bank, Mario Draghi, ruled out the possibility of raising interest rates in the next year, instead raising the possibility of fresh monetary stimulus to boost weak European growth and persistently low inflation.  The decision came as a response to the overshadowing trade war between the US and China which might spill over to the EU in the form of tariffs on EU autos.  IHS Markit’s flash Eurozone PMI data hit a seven-month high, although the pace of growth appears to have remained subdued, and with the service sector helping to offset the ongoing manufacturing downturn.

In response to the uncertainty surrounding US monetary policy, combined with higher perceived trade war risks, the Bank of Japan (BoJ) signalled that it, too, is leaning more towards ramping up monetary support.  Trade pressures continue to drag on exports, which declined 7.8% year-on-year in May, following a 2.4% year-on-year fall in April. As widely anticipated, the BoJ maintained its short-term rate target at -0.1% and pledged to guide 10-year government bond yields to around zero percent.  A breakdown in trade negotiations between the US and China could trigger earlier BoJ action.

The US and China continued trade talks during June’s G20 summit, with both nations appearing willing to find a solution.  China saw imports from the US (-27%), Japan (-16%) and South Korea (-18%) fall, as a result of trade uncertainties between the world’s two largest nations, but exports returned to growth in May despite higher US tariffs.  House prices in China continued to recover in May.  New and secondary house prices registered solid gains, with national house prices rising 11.3% year-on-year. In India, export momentum recovered in May – the monthly trade deficit was the largest in six months but remains in-line with its twelve-month average. India is expected to grow in excess of 7% in the fiscal year 2018-2019.

With the US experiencing such a long period of expansion, accompanied by steadily lowering profit forecasts around the world, it is understandable that investors might be becoming anxious about the outlook for growth and profits over the near term.  However, major central banks continue to hint at policy relief.  Easing financial conditions will continue to support equity markets and potentially mitigate downside risks in the near term.  We continue to advise our clients on the importance of holding a well-diversified portfolio and taking a long-term view on their investment performance.

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.