Economic and Market Review


2019 Quarter 2 Economic Review

It was a relatively choppy period for financial markets during the second quarter. While stock markets saw solid growth in April, investors soon became concerned about slower global growth and the threat of trade wars, causing markets to fall.

Faced with weaker economic data and low inflation, centrals banks eventually came to the rescue by signalling that interest rate cuts may soon be necessary. This reassured investors and caused stock markets to rise.

Much of the focus during the quarter was on the ongoing trade dispute between the US and China. After a long standoff that many believed had a negative impact on the global economy, the quarter ended with the two countries agreeing to resume talks towards a trade deal.

Economic update

At a global level, the story for 2019 so far is slower growth than previous years as the global economy moves towards the later stages of the cycle. China’s economy has slowed down as a result of tighter financial regulations and its trade dispute with the US, while Europe has lost momentum due to weaker consumer and business sentiment. These factors, along with fall-out from the US-China trade dispute, prompted the International Monetary Fund to revise its forecast for global growth in 2019 down to 3.3% from its previous level of 3.5%, with the expectation that it will return to 3.6% in 2020.

Here in the UK, there was a string of downbeat news during the quarter. In April, gross domestic product (GDP) growth – the main measure of economic activity – fell by 0.4% from the month before, while industrial output weakened. Meanwhile, the inflation rate, which measures the price of goods such as food and clothing, was lower, with the consumer prices index (CPI) falling to 2% in May from 2.1% in April. The manufacturing sector contracted as companies reduced stockpiles and car production plummeted after the UK was given an extension to its departure from the European Union.

Europe was also dealt a blow as slower growth, decreased industrial activity and ongoing political risk continued to dominate. While the first quarter saw GDP growth in the eurozone accelerate to 1.2% in the first quarter – reversing the decline seen in the second half of 2018 – this was soon overshadowed by bad news out of Germany. Factory orders in Germany declined by 2.2% compared with April, a much deeper fall than expected, translating into an 8.6% drop in orders compared to the previous year.

For the US, which has enjoyed a buoyant economy for much of the past two years, the situation was mixed. While gross domestic product (GDP) for the first quarter came in at a robust 3.1% and unemployment remained near all-time lows, inflation was muted, growth in the manufacturing sector slowed, and consumer confidence fell, with some of this blame being laid on the trade war with China. At the same time, business confidence weakened and business activity slowed down.

There was little doubt Asia Pacific felt the full force of the US-Chine trade dispute over the quarter. In Japan, there are concerns that it is losing economic momentum given that it is particularly exposed to the vagaries of the global economy. With China’s economy growing at a slower rate, demand for manufactured goods weakening, and a possible global slowdown on the horizon, there may be more bad news on the horizon for Japan.

Emerging markets had a particularly volatile time, especially China. The world’s second-largest economy continued to see weakness. Industrial output fell sharply, while the International Monetary Fund (IMF) estimates that GDP growth for 2019 will come in at 6.3%, down from 6.6% in 2018.

Market commentary

Over the quarter, global stock markets delivered a mixed performance. Equities in developed markets such as the US, UK and Europe finished the quarter in positive territory. However, Japan and the emerging markets slipped into negative territory as concerns about global trade data dented investor sentiment.

UK equity markets delivered solid positive returns, with companies in sectors such as technology and consumer goods being the main drivers, while domestically exposed companies that face Brexit uncertainty underperformed. European equities performed well over the quarter, being lifted by the prospect of interest rate cuts by the US Federal Reserve and European Central Bank (ECB), as well as the prospect of more quantitative easing from the ECB. Once again, US equities were particularly strong and reached all-time highs, being driven largely by positive signals from the US Federal Reserve that interest rates may soon be cut.

On the flipside, equity markets in Asia Pacific struggled over the quarter as trade wars and slower global growth dented investor confidence. China’s stock market, which had a strong rally at the start the year, followed a downward trend over the quarter, driven by weaker than expected economic data and continued uncertainty around trade.

Emerging market equities encountered a challenging period, having been hit hard by trade tensions and slower global growth. As a whole, emerging markets delivered a small positive return, well behind developed markets.

In fixed income, government bonds delivered positive returns alongside riskier assets such as company shares. A key driver for this was the expectation that central banks will cut interest rates. Corporate bonds were also positive over the quarter as they also benefited from the prospect of lower interest rates

Current positioning

Given current economic and market conditions, it is clear that global growth is slowing, demand is falling and central banks in developed economies are facing pressure to cut interest rates. Where markets go from here depends on whether the US and China can agree a trade deal, and whether central banks will have enough firepower to stimulate growth and support markets.

We have positioned our portfolios to reflect where we are in the current economic and market cycle. With stock markets moving higher throughout the first half of the year and the global economic picture being mixed, our expectation is for lower returns in the months ahead.

After a period of solid returns, we have reduced our exposure to UK equities because we believe they have limited growth prospects. Conversely, we have increased exposure to emerging markets equities because we feel they have underperformed other markets and therefore we believe they more room to grow. On the fixed income side, we are reducing exposure to global bonds and corporate bonds, and increased exposure to UK government bonds.

All our portfolios carry a degree of risk and as such their unit price will move both up and down in different measures depending on their risk rating.  We have already factored into our recommendations that the value of your investments will fall as well as rise at different times.

However, if you feel at all uncomfortable with the volatility of any investment, we are advising you on, please contact your adviser who can discuss this with you and, if necessary, carry out a reassessment of your ability to bear losses and appetite for investment risk.