Investment Comment November 2018

Investor perceptions of downside risk to the global economy, along with global trade war uncertainties, aggravated the decline in investor confidence in October, which saw the second correction of 2018. The subdued market confidence materialised in a technology selloff in the US, with the most well-known ‘FAANG’ (Facebook, Amazon, Apple, Netflix and Alphabet) stocks amongst the hardest hit.

In the US, national GDP grew above expectations in the third quarter at 3.5%, with robust employment and lower tax rates boosting demand. American workers received their largest annual pay rise in nearly a decade, with wages increasing by 3.1% year-on-year in October, thereby surpassing annual inflation of 2.3% in September. The unemployment rate remained unchanged at 3.7%; the lowest since 1969.

However, fiscal and monetary policy is expected to be far less supportive next year, with rises in interest rates and a stronger Dollar subduing demand for US equities. The Federal Reserve’s most recent interest rate hike increased the yield of the three-month US Treasury Bill (a global proxy for cash) above all three main measures of US inflation for the first time since the early days of the global financial crisis. US fundamentals remain strong and indicative of growth, but ongoing trade war uncertainties remain a concern for future prospects. The International Monetary Fund (IMF) downgraded growth expectations from 2.7% to 2.5% for 2019, to reflect their estimate of the effect of tariffs.

In the UK, the Office for Budget Responsibility (OBR) raised its economic growth forecast for 2019 to 1.6%, an increase of 0.3% from the Spring Statement prediction, despite the year-on-year contraction experienced in October. UK wage growth is at its highest level since the global financial crisis, with average weekly earnings in the third quarter increasing 3.1% year-on-year, exceeding the consensus forecast of 2.9%. However, uncertainty surrounding Brexit negotiations continues to rattle markets with business confidence falling to its lowest level since the global financial crisis. UK public finances are also under pressure, nearing the bottom of the IMF league table. With UK inflation currently at 2.4%, the Monetary Policy Committee voted unanimously to keep rates at 0.75% but reiterated their plan to gradually increase interest rates to 1.5% by mid-2021.

The Eurozone Purchasing Managers Index (PMI) declined in October to 52, down from 53.2 in September, with the ripple effect of the trade war encouraging a more risk-averse temperament in the global economic environment. However, business confidence remains fairly robust and the labour market is strengthening. The IMF expects a 1.9% expansion for the area in 2019.

A negative outcome on trade between the US and China is expected to have significant growth consequences for the wider Asian market. The World Bank, in their East Asia and Pacific economic update, estimates that a 1 percentage point drop in China’s GDP growth would subdue expansion in developing Asia-Pacific countries by 0.5% after two years. However, China continues to grow in line with expectations, expanding by 6.5% year-on-year in the third quarter. The People’s Bank of China also injected $109bn into the economy and reduced the reserve requirements ratios to mitigate trade war pressures on growth.

Restoration efforts in Japan, following natural disasters in September, supported national sales growth and saw the Japanese PMI increase to 52.4, up from 50.2 in September. The Bank of Japan also highlighted that the years of monetary stimulus are coming to an end and hinted towards monetary tightening.

The US formally imposed sanctions on Iranian crude exports but granted temporary waivers to eight countries including China and Japan. Oil prices retreated, with Brent crude down 0.4 per cent at $72.88 a barrel.

With the results of the US midterm elections showing an increased Republican majority in the Senate but a change to Democratic control in the House, continued fiscal stimulus looks less likely, but growth should remain relatively robust. Short-term uncertainties should be offset by growth in the Eurozone, China and Japan as temporary hits to national growth dissipate, and Chinese policy easing takes effect. This is supported by the revised growth expectations from the IMF in October, which suggest that the global economy will continue to grow at 3.5% throughout 2018 and 2019. Attractive opportunities across global markets remain. We continue to advise our clients on 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.