General Overview.
Global equity markets, including global emerging equity markets ended April in positive territory
driven by the strong performance from US stocks in particular. The US equity market reached record
highs on the back of better-than-forecast company earnings. Sentiment was also boosted by strongerthan-expected US economic growth for the first three months of 2019. Government bond yields rose in April, with strengthening economic data from China helping to push yields upwards. Official data indicated that the Chinese economy had grown faster than expected.
Global equity markets had their worst month of the year in May as trade tensions between US and China unexpectantly intensified and fears grew over a global economic slowdown. US President Donald Trump announced plans to hike tariffs on Chinese goods and China hit back at Washington with its own retaliatory tariffs. The escalation in the trade war between the world’s two largest economies drew investors back to so-called ‘safe-haven’ assets, such as government bonds and gold. The 10-year Treasury Yield, seen as an important indicator of investor confidence, fell from 2.51% to 2.14%, over the month. Market sentiment soured further as Donald Trump threatened higher tariffs on Mexican goods. The reversal of Trumps’ unexpected tariff threat on Mexico however, provided strong support for both bonds and equities in early June.
Optimism guided global equity markets in June fuelled by the prospect of interest rate cuts by central banks globally and hope that the US-China trade war could still be resolved. Rebounding from a rout in May, markets shrugged off concerns about a slowing global economy to focus instead on the prospect of interest rate cuts around the world. Meanwhile, ahead of the highly anticipated US-China presidential meeting at the G20 gathering in Osaka hopes were high for a breakthrough in the trade
war. A decision at the end of the month to resume trade talks after a six-week stalemate was set to further support global economic growth.
G20 Summit, Osaka, Japan
The G20 (or Group of Twenty) is an international forum for the heads of state, governments, finance ministers and central bank governors etc from 19 countries and the European Union (EU).
On the 29th June 2019 at the G20 summit, President Trump and President Xi agreed to restart US-China trade talks. This provided a boost to the global equities markets.
The recent trade truce between the US and China delivered a nice start to last week’s trading week for equities all around the globe. All the major indices moved higher on the reset of trade talks
between the world’s two largest economies. The Dow Jones and the S & P 500 Indices in the US hit new all-time highs. President Trump softened his tone on supplying Chinese tech giant Huawei and signalled he will not raise tariffs, while China will buy more US farm goods. The concessions from both sides brings negotiations back to where they were in talks in late April. Equities were also being sought after last week on the expectation that the US central bank (The Fed) would cut rates soon. That said equities are only likely to be able to sustain further significant increases if global growth bottoms out at a level which will support further gains in corporate earnings. While Fed easing should clearly help in this respect down the road, global growth is at the moment still decelerating.
Global Equities
The following chart reflects the performance of the MSCI World index over the year ending 5th July 2019, rising over 13% over the period, in sterling terms and reflecting that strong recovery in 2019, notwithstanding some heightened volatility experienced during May 2019.
The MSCI World is a market cap weighted equity market index of over 1600 stocks from companies throughout the world, although excludes companies in emerging and frontier markets. It is a widely used benchmark to assess how equity markets have performed globally
US Equities
The US equity market reached fresh record highs in April on the back of better-than-forecast company earnings. Some 80% of the companies that make up the S&P 500 index reported results which exceeded estimates (source: Bloomberg, as at 23 April 2019). Market sentiment was also boosted by stronger-than-expected US economic growth for the first three months of 2019. The US economy grew at an annualised rate of 3.2% during the first three months of the year, overcoming a prolonged government shutdown, trade tensions and global economic uncertainty. The stronger than expected economic data supported equities and market strength was driven by financial stocks.
The rally in bank stocks specifically came after a solid first-quarter earnings season, with retail banking businesses outperforming while investment banking and capital markets operations lagged. Strength also came from technology stocks which were powered by Microsoft. It became the biggest publicly traded company in the world by market capitalisation in April, and the third company to achieve a US$1tn valuation. Apple and Amazon had already reached that milestone.
The jump in Microsoft’s share price followed better-than-expected sales and earnings in the first three months of this year as businesses continued to sign up to its expanding cloud services suite. Health care stocks and real estate lagged the broader market. However, on the final day of trading for April, Google parent Alphabet posted disappointing numbers after first quarter revenue fell short of market expectations. The information technology and communications sectors still ended the month with positive gains. Healthcare stocks, meanwhile, faced headwinds from ongoing concerns over changes to drug pricing legislation.
US equities were significantly weaker in May after US-China trade talks broke down and Donald Trump threatened higher tariffs on Mexican goods. The US government increased the tariff rate on $200 billion of Chinese goods to 25% from 10% and China responded by hiking the tariffs on $60 billion of imports from the US. The Federal Reserve (Fed) maintained a dovish stance with regards the direction of US interest rates, a stance it has held since the start of the year.
Economic data released during the month of May was mixed with total nonfarm payroll employment increasing by 263,000 in April, sending the overall unemployment rate to 3.6%, from 3.8% a month earlier. Wage growth remained steady at 3.2% compared with a year earlier. The US manufacturing purchasing managers’ index (PMI) fell two points to 50.6, while the new orders component declined to below 50, indicating that the sector is contracting. However, US consumer confidence remained robust, with a reading of 134.1 in May, compared with 129.2 a month earlier.
Unexpectedly weak US economic numbers heightened concerns that the trade war could weigh on a global economy that’s already slowing. While US economic growth remained robust in the first quarter, fresh government data in May showed less business investment, a decline in corporate profits and muted consumer spending.
The US administration blacklisted Chinese tech giant Huawei on security fears and said it will impose a new tariff of 5% on all Mexican imports in a bid to force Mexico’s government to stem the flow of migrants entering the US across its southern border. The technology, energy and industrial sectors were among the weakest performers in May as investors became nervous about the prospects for global growth. Utilities, healthcare and consumer staples, whilst also lower, proved to be more resilient. The real estate sector outperformed. Energy stocks fell the most amid concern over global demand. Tech stocks were negatively impacted following the moves by the US Government against the telecoms giant Huawei which sent share prices lower. President Trump signed an order that’s expected to restrict Chinese telecommunications firms from selling in the US. As the trade war developed, President Trump’s threats around Huawei reverberated across the global supply chain and hit some of the biggest component makers.
The US equity market was led higher in June by materials, energy and tech stocks. It was a reversal of fortune for the materials sector, supported by gold prices that hit six-year highs on the back of a weakening US dollar and heightened geopolitical tensions earlier in the month. The price of oil fuelled the share prices of energy stocks as US inventories dipped and exports hit a record high, while an incident involving oil tankers in the Gulf of Oman sent oil prices climbing higher. Utilities, real estate, consumer staples and health care – all traditionally defensive stocks and less sensitive to the business cycle – were the laggards during a month in which optimism improved.
On the economic data front, the Commerce Department issued its final revision of first quarter GDP growth and said the US economy grew at a solid rate of 3.1% in the first quarter, but consumer spending and business investments grew at a slower pace than in the earlier estimates. Markets will be focusing on the Q2 earnings results issued by leading companies in the US over the next couple of weeks and this will provide further indicators with regards to the direction of travel for US equities.
The chart below highlights the performance of the American Stock Market index S & P 500 over the quarter period to 28th June 2019 and reflects that continued strength of the US equities market, although volatility rose during May.
The S&P 500 closed at a level of 2941.76 on 28th June 2019, rising approximately 3.7% over the Q2 2019 period.
UK Equities
The UK equity market provided a positive return during April, although it lagged global equities.
Following months of heightened political turmoil, the European Union granted the United Kingdom an extension to Article 50 until 31 October 2019, removing the immediate threat of a ‘no-deal’ exit. While the political impasse continued through into month end, domestic equity and currency markets appeared soothed by the news, with sterling trading broadly flat against the US dollar over the month.
Despite the political uncertainties, UK economic growth continued to surprise positively. The latest monthly GDP release from the Office for National Statistics revealed that the economy had expanded again in February, at 0.2%, albeit at a more subdued rate than the 0.5% recorded for January. Furthermore, UK employment reached a record high during the three months to end February 2019, while unemployment fell to the lowest rate since 1974.
A resurgence in manufacturing was also evident, as reflected in recent readings from Markit’s PMI surveys. In March the UK manufacturing PMI struck 55.1, its highest level in a year. However, the market concluded that the recovery had been driven by business stockpiling in the run-up to the original 31 March Brexit deadline. In company news, the UK Competition and Markets Authority published its final report on the proposed merger between Sainsbury and Asda during April, blocking the deal. The decision was made due to concerns that the merger would lead to decreased competition and higher prices for consumers. April proved another challenging month for many of the UK high-streets retailers. Debenhams lost its battle to remain independent during April, as the company’s creditors took control of the business mid-month, announcing a number of store closures and the resignations of the company’s Chief Executive. In contrast, online fast-fashion retailer Boohoo released strong annual results towards month end, showing a 48% increase on revenues compared to the year before.
Having reassured markets by securing an extension to Article 50 at the beginning of April, the month of May proved a volatile month in British politics. The Conservative party suffered a widely anticipated defeat at the European elections, with pro and anti-EU parties making significant gains. Theresa May announced her intention to resign at the beginning of June, prompting the start of the Conservative leadership contest and hence the race to be Britain’s next Prime Minister. Against this backdrop, the value of sterling fell against international currencies, returning the gains made against the euro and US dollar since the start of 2019.
At its May meeting, the Bank of England’s Monetary Policy Committee voted to hold the base interest rate at 0.75%, whilst raising its growth forecast for the year to 1.6%. Economic data released during May, showed that unemployment fell to 3.8% in the three months to end March, the lowest rate since 1974. Meanwhile in the three months to April, UK consumer spending rose 0.7% compared to the same period in 2018, supported by strong employment data and improved trading conditions.
In its latest quarterly inflation report the Bank of England upwardly revised its 2019 growth forecast, from 1.2% to 1.5%. This reversed part of the forecast downgrade made at the time of the previous inflation report in February, when the bank cut 2019 growth from 1.7% to 1.2%. Evidence emerged that the surge in manufacturing activity seen before the initial 31 March Brexit deadline had begun to unwind. Markit’s UK manufacturing purchasing managers’ index (PMI) slipped two points to 53.1 in April, supporting fears that the pick-up had been driven by stockpiling, to guard against a disorderly EU departure. On a more positive note, services activity stabilised, with Markit revealing that its services PMI picked up to 50.4 in April, bouncing back from the sub-50 level in March.
Domestic politics continued to draw media attention during June, as the Conservative Party leadership contest began and from a market perspective, the risk of a no deal Brexit increased. However, markets appeared untroubled by the resurgent likelihood of an early general election or no-deal exit, as the candidates for Prime Minister mooted their plans to withdraw the United Kingdom from the European Union. The value of sterling against international currencies ended the month broadly flat, despite dipping to 1.25 versus the US dollar mid-month as the Bank of England (BOE) cut its UK economic growth forecasts. The central bank’s Monetary Policy Committee (MPC) voted to keep interest rates on hold at 0.75% during its June meeting, but warned that it expects economic growth for the second quarter to be flat. The MPC cited the impact of unwinding stockpiles, which had contributed to positive GDP growth in the first quarter, as companies in both the UK and EU prepared for the original 31 March 2019 Brexit deadline.
Economic data released during June showed that UK retail sales were comparatively lower during April and May compared to 2018. The dip in consumer confidence was compounded by strong data from 2018 where retail sales received a boost from the hot weather and Royal Wedding. Meanwhile data released at the end of June showed that UK car production was 15% lower during May than over the equivalent period in 2018, reflecting a 12th consecutive month of declines.
Only last week however, the Bank of England Governor, Mark Carney announced that the BOE expects UK economic growth in the second half of the year to be considerably weaker and they will assess Brexit and trade tensions in August.
The chart below compares Sterling against the Euro over a five-year period ending 8 th July 2019. The pound is currently trading around the 1.11 Euro mark, weakening over the months of May and June. When markets feel that the likelihood of a hard or no deal Brexit has increased, this tends to weaken
Sterling and vice versa.
The chart below highlights the performance of the UK index FTSE 100 over the quarter period to 28th June 2019 and reflects that volatility in May as global trade tensions escalated. The FTSE 100 closed at a level of 7425.63 on 28th June 2019, rising approximately 2% over the Q2 2019 period.
Contenders for Prime Minister
Conservative Party leadership
Party members to vote for either Boris Johnsonor Jeremy Hunt.
The winner of the contest to take over fromTheresa May on 24 July
European Equities
After strong gains in Q1 2019, eurozone equities registered a further advance in April as trade tensions remained contained, signs emerged that Chinese stimulus measures were working and better than expected Eurozone economic data was released. Top performing sectors included information technology (IT), financials, consumer discretionary and industrials. Within IT, a number of semiconductor companies released stronger-than-expected Q1 results, sparking hopes of a turnaround in the sector after last year’s weakness. In the consumer discretionary sector, automakers enjoyed better performance. By contrast, energy, utilities and real estate saw negative returns. Improving data from China helped to lift sentiment towards economically-sensitive areas of the market, such as consumer discretionary (goods and services deemed non -essential by consumers).
The eurozone economy grew by 0.4% in the first quarter of 2019, according to preliminary GDP data published on 30 April. The rate of acceleration, twice that of 2018 quarter four, came as a surprise to many economists who were estimating lower growth to be in the region of 0.1% to 0.3%. Furthermore, Italy, the third largest eurozone economy, exiting a technical recession by registering growth of 0.2%.
Elsewhere in Europe, the Spanish Socialist Workers’ Party (PSOE) won the general election, though remaining 11 seats short of a majority. Leader Pedro Sanchez, who initially called for the snap election after parliament rejected his 2019 budget proposal, needs to form a coalition with one of the other parties before he is able to form a government. Following the results, the domestic stock market initially sold-off but then quickly rebounded, eventually ending the month in positive territory.
Eurozone equities experienced declines in May with the MSCI EMU (European Economic and Monetary Union) index declining by 6.4%. The outlook for global trade remained a primary concern
as tensions between the US and China escalated and US President Trump threatened to apply 5% tariffs on goods from Mexico. This led to a “risk off” environment that saw investors favour lower risk assets such as government bonds rather than equities.
In the eurozone the materials and financials sectors saw the steepest declines while perceived safe havens such as utilities and consumer staples fared better. Those industries most sensitive to global trade, such as autos and semiconductors, fell sharply. Data from Germany showed that the country avoided recession, with a GDP growth rate of 0.4% in Q1. However, forward-looking data remained somewhat lacklustre. The Ifo business climate index fell to 97.9 points, indicating a worsening mood among German businesses.
Italy’s fiscal position was in focus after the European Commission (EC) cut its forecast for 2019 Italian GDP growth to 0.1% from 0.2%. This would mean the budget deficit would exceed the level previously agreed between Italy and the EC. The elections to the European Parliament were another focus with centrist parties losing ground in many countries while Green parties made gains and anti-EU populists made only a limited advance.
European equity markets made strong gains in June as investors remained hopeful that Trump and Xi would move closer to a trade deal at the G20 summit. Meanwhile, in his latest speech, ECB President Mario Draghi suggested that the Central Bank will further loosen monetary policy (to stimulate economic growth) unless they see an improvement in economic data. The Flash Eurozone Composite PMI (Purchasing Managers Index) – a figure that represents current and future business conditions – hit a seven-month high in June after reaching 52.1 (51.8 in May). A PMI of above 50 suggests economic expansion. Growth was driven by the Services component which saw its sharpest rise since November 2018. Meanwhile, the Manufacturing component continued its decline, as trade tensions and fears of a global slowdown continued to weigh heavily on the sector.
Christine Lagarde is a French lawyer and politician serving as Managing Director and Chairwoman of the International Monetary
Fund (IMF) since 2011 and has very recently been nominated for the ECB Presidency.
Current ECB President, Mario Draghi’s term is scheduled to end on the 31st October 2019.
The markets anticipate she will maintain a dovish stance to buoy the euro zone economy.
The chart below highlights the performance of the European index Euro Stoxx 50 over the Q2 quarter period to 28th June 2019 and again highlights market volatility seen during May 2019. The Index was designed to be a ‘blue chip’ representation of 50 leading companies in the Eurozone. The Euro Stoxx 50 closed at a level of 3473.69 on 28th June 2019, representing an increase of approximately 3.6% over the Q2 period.
Japanese Equities
Japanese equities ended the month of April slightly higher, with improvements in US-China relations and a shift in US central bank policy among the main performance drivers. Investor confidence grew as a conclusion to trade hostilities appeared to draw slightly closer, allowing Japan’s equity market to maintain its positive start to the year. Consumer discretionary and communications services led sector performance. Macroeconomic indicators for the period were mixed, with industrial output falling 0.9% in March, while retail sales were up 0.2%. The Bank of Japan announced that it would not raise interest rates until 2020 in a bid to increase stability.
In line with regional markets, the reignition of US-China trade tensions in early May saw Japanese equities end the month of May lower, surrendering gains made over the first four months of the year. Mixed economic data at home further weighed on performance as one of the government’s main indicators showed that Japan’s economy was “worsening” as key export markets suffer from the trade rift between the US and China. Meanwhile, official figures showed that Japan’s economy grew at 2.1% over the first quarter, beating expectations, while both private consumption and capital expenditure posted declines, creating a cloudier outlook.
Meanwhile, Japanese equities ended the Q2 period higher as optimism over the possibility of the US and China coming to some form of reconciliation cheered markets higher. Expectations of the Fed cutting rates further added to the positive momentum seen across June ahead of the G20 summit where Trump and Xi would meet. Macroeconomic indicators for the period, however, were mixed with consumer price inflation lower in May, as was June manufacturing. The Bank of Japan’s (BOJ) “tankan” survey (reflects business confidence) showed that corporate confidence had worsened as export manufacturers suffered from the US-China trade war and related global slowdown.
Our preferred fund managers remain optimistic with regards to the long- term potential for the region. Furthermore, with the 2020 Olympics in Tokyo not far away, preparations are in progress and this infrastructure development should support the economy and will hopefully encourage investment activity.
The chart below highlights the performance of the Japanese TOPIX index over the quarter period to 28th June 2019 and reflects that volatility experienced in May as global trade tensions escalated. The TOPIX Index closed at a level of 1551.14 on 28th June 2019, representing an approximate 2.5% decrease in the index level over the Q2 2019 period.
The recent strength of the Japanese Yen in 2019 is reflected in the Yen v Dollar chart below. Over the Q2 2019 period, the strengthening Yen, weighed on the Japanese equities markets, in particular those exporting names, who need to convert back their overseas sales income into Yen. At times, the Japanese Yen is seen as a safe haven and when global trade tensions increased in May 2019, global investor demand for the Yen increased, thus strengthening the Yen currency.
Asia Pacific (Ex Japan) Equities
Asian equity markets ended April higher as the first quarter’s positive momentum drove performance through the first half of the month. Steady progress in US-China trade talks, positive economic indicators from China and an improvement in the global economic growth outlook helped buoy investor sentiment.
Markets gave back some of their gains in the second half of the month on concerns that China’s central bank might temper monetary stimulus measures, while some regional economic data disappointed. Meanwhile, the US dollar gathered strength and the oil price rose. Over the period Singapore, Taiwan and China outperformed their regional peers. India ended the period flat while in ASEAN markets, Malaysia was lower. In terms of sectors, IT, consumer discretionary and communication services led performance. Singapore was the best performer, helped by a rally in the banking sector.
Chinese stocks continued their positive performance on the back of signs that the US and China continued to inch towards a trade agreement combined with the global central banks’ shift towards a more accommodative monetary policy and a more pro-growth Chinese government position have helped restore some confidence in markets. However, there were concerns that the People’s Bank of China might be starting to reduce its economic stimulus. Broader economic indicators were positive with first quarter GDP growth at an above-estimate 6.4%. Industrial output and retail sales were also positive. However, the manufacturing purchasing managers’ index (PMI – an indication of an economy’s health) for April edged down to 50.1 from 50.5 in March, and the non-manufacturing PMI slipped to 54.3 from 54.8, indicating a possible slowdown in output.
In Korea, markets showed improvement from the previous month’s performance, while some economic data pointed to potential signs of progress with April exports down a less-than-expected 2%. Korean economic data remained lack lustered as exports and industrial production were hit by a combination of concerns over the health of the global economy, a slowdown in Chinese economic growth and US-China trade disputes, which affected the broader region. India stocks gave up the previous month’s gains to end April flat as the polls opened in the country’s general elections. The Reserve Bank of India (RBI) announced a cut in repurchase rates – the rate at which a central bank lends to commercial banks – to 6% from 6.25% and promised to ensure ample liquidity in the system amid mixed economic data: economic growth has been slowing while inflation remains below target. The RBI also revised down its 2020 economic growth forecast to 7.2% from 7.4%.
South Korean shares underperformed the region, weighed down by poor corporate earnings. Separately, the economy contracted unexpectedly in the first quarter amid slowing investment and
falling exports. Indian stocks also trailed on the back of declining financial shares. The central bank cut its benchmark interest rate to 6%, from 6.25%, to spur growth. Malaysian stocks remained one of the worst performers in ASEAN and the broader Asian region. The market posted a negative return as most sectors retreated. Indonesian shares underperformed as investors await the official results of the country’s presidential elections. Early indicators showed incumbent President Joko Widodo winning a second term in office.
Asian equity markets ended the month of May lower as trade tensions escalated and concerns surrounding global growth increased. Against this backdrop, there was divergence in market performance with China being amongst the poorer performers while India and Australia outperformed the region. In terms of sectors, technology was particularly weak after President Trump placed the large Chinese telecom company, Huawei, on a trade blacklist, a move which had negative implications for many technology companies.
China’s equity market suffered as economic growth was perceived as being under threat from higher tariffs and a weaker technology sector. Furthermore, mixed macroeconomic data suggested that the economic recovery was fragile. Industrial production growth (April) declined while retail sales weakened on disappointing auto sales. Elsewhere, the Korean and Taiwanese equity markets were also negatively impacted by the poor share price performance of technology companies and trade tensions given these markets’ high exposure to global trade. On the positive side, Indian equities outperformed the region as the ruling BJP’s victory in the recent general elections ensured policy stability. This was despite the announcement of fourth quarter GDP growth 2019 (full year) forecasts which were weaker than expected. Finally, the Australian market outperformed as it benefited from the Liberal Party’s victory in the national elections which ensured policy continuity.
Asian equity markets staged a recovery in June on renewed confidence of a breakthrough in US-China trade talks ahead of a meeting between President Trump and President Xi at the G20 summit in Osaka, Japan. The meeting concluded with an announcement that the two sides would resume negotiations while the US promised to temporarily halt a new 20% tariff on US$300bn worth of Chinese imports and to lower some restrictions on Chinese technology giant Huawei. China, in turn, agreed to increase its purchase of US food and agricultural products.
Market sentiment was further buoyed by indications from the US Federal Reserve (the Fed) that it would consider interest rate cuts soon as the global economic outlook remains opaque given weaker data and the net negative impact of ongoing trade tensions. Singapore, Thailand, Korea and China led regional market gains while all Asian currencies rose against the US dollar. Indian equities however dipped slightly in June following a mid-May rally on the back of the ruling Bharatiya Janata Party (BJP) return to power. While the full-year macro outlook remains somewhat clouded, recent monthly indicators including PMI, industrial production and exports have been positive.
The total return chart below highlights the performance of the MSCI Asia Pacific index over the quarter period to 28th June 2019. On a total return basis, the Index increased slightly by approximately 0.70% in sterling terms, despite the heightened volatility, seen during May 2019.
Emerging Market EM Equities
The upswing in emerging equity markets extended for another month covering April. Emerging markets equities posted a positive return in April as easing global growth concerns supported risk
appetite.
Egypt and South Africa led the MSCI Emerging Markets index higher. In South Africa equities rallied in advance of May’s general election. Russia, where higher crude oil prices proved supportive, and Mexico outperformed. In Mexico, the senate approved the labour reform bill, paving the way for approval of the US-Mexico-Canada Agreement. By contrast, Turkey registered a negative return as ongoing policy concerns, including an underwhelming economic reform plan, continued to pressure the lira.
The strongest performer was EMEA (Europe, Middle East & Africa), with Egypt, South Africa and Greece leading the gains. Confidence towards Asia was boosted by better news on the Chinese
economy – first quarter GDP was 6.4%, slightly above consensus forecasts – and an interest rate cut in India. However, it was Singapore (banking stocks) and Taiwan (technology sector) that came out on top within the region. Performance in Latin America was more mixed, with strength in Mexico making up for weakness in Brazil and Colombia. From a sector perspective, consumer discretionary, communication services and technology enjoyed the biggest gains, with materials and utilities being the laggards. Aside from the Turkish lira (down 6.6%), emerging market currencies were steady against the US dollar. Turkey had a more challenging April on concerns that the country’s central bank had bolstered its foreign currency reserves with billions of US dollars of short-term borrowed money. Brent crude oil prices rose sharply on supply concerns following the US decision to end waivers on Iranian oil imports.
Disappointing numbers on the Mexican economy – it shrank 0.2% in the first quarter from the previous three months – did not derail an upswing in local equity prices, as investors reacted favourably to the government’s prudent approach to running the nation’s finances. Despite a dip in economic activity at the start of this year, the Mexican economy is expected to grow by 1.5% (consensus forecasts) in 2019. Equity markets elsewhere in Latin America all finished lower, with weaker copper prices having an adverse impact in Chile and Peru. While equity losses in Brazil were modest, the government continues to make, albeit at a slow pace, progress in implementing its pension reform programme. A congressional committee in Brasilia voted that the proposed pension reform bill was constitutional and could proceed through to Congress.
Emerging market equities fell in May as US-China trade talks unexpectedly broke down, and global growth concerns increased. Separately, the US announced plans for a 5% levy on Mexican imports. China was the weakest index market, negatively impacted by the escalation in trade tensions South Korea and Taiwan underperformed, amid expectations for supply chain disruption and a negative impact from weaker global trade. Other laggards were Colombia, where a correction in the price of crude oil weighed on sentiment, and Chile, where copper price weakness was a headwind. By contrast, Russia posted a solid gain, benefitting from a strong rally in state-controlled oil company Gazprom. Brazil and India also outperformed. India registered a small gain as Prime Minister Modi’s Bharatiya Janata Party was re-elected with a stronger mandate.
A re-escalation of trade tensions between the US and China unnerved equity markets across both the developed and emerging world on fears that it could hamper the recovery in global growth. Given their higher sensitivity to global trade, equity markets in Asia, led by China, Korea and Taiwan, fell sharply. However, India bucked the trend by registering a modest gain following the victory of the ruling party (BJP) in the general elections. All sectors in emerging markets finished in negative territory, with consumer discretionary, telecoms and technology being the main laggards. The US dollar gained ground against a basket of emerging market currencies, with the Chinese renminbi losing 2.5% of its value as it approached 2018 lows. Commodity prices also weakened with Brent crude oil and copper among the biggest fallers.
Mexican stocksfell on news that the US would impose a 5% tariff on all goods from the country starting 10 June 2019 unless Mexico stops illegal immigration to the US. The tariff would increase every month up to 25% on 1 October. While the initial reaction from Mexico was dialogue and not retaliation, the prospect of a trade war between the two countries could lead to lower growth and higher inflation for Mexico. Furthermore, fears rose that it could hold up the ratification process of the previously negotiated trade agreement between the US, Mexico and Canada.
By contrast, equity prices in Brazil advanced higher on the prospect that both houses of Brazil’s Congress are ready to enact key pension reform. However, news on the Brazilian economy was less positive in the first quarter of 2019 with GDP contracting by 0.2%. Meanwhile, President Macri’s attempt to bring in market reforms in Argentina is still facing resistance from the trade unions as a nationwide strike brought much of the country to a standstill towards the end of May. Despite labour unrest, Argentina was the best performing equity market as the country regained its place within the MSCI Emerging Market Index, along with new entrant Saudi Arabia.
Equity markets in emerging Europe also closed lower although at a country level there was dispersion in performance. Russia extended its winning ways to the year by gaining further ground, aided by a rally in banking and energy stocks. Greece also had a positive month to cement its position as the best performing emerging equity market year-to-date. The outcome elsewhere in the region was less favourable, with Poland, Hungary and Turkey registering losses. Turkey’s inflation slowed for a second month thanks to a moderation in food costs with consumer prices easing to 18.7% in May from 19.5% in April.
Emerging equity markets rallied across the board during June with confidence boosted by growing expectations that central banks across several countries, including the US and China, stand ready to lower interest rates on global growth concerns – the futures market is currently pricing in three US interest rate cuts this year, starting in July. While a trade deal between the US and China remains elusive, the recently concluded G20 meeting in Osaka ended on a positive note with additional tariffs being delayed indefinitely.
Chinese equities gained on positive trade news flow while the central government indicated its ongoing support for the domestic market. The People’s Bank of China stated that it injected
approximately US$108bn into the market in June to maintain liquidity in the banking system at a “reasonably sufficient level” while the Ministry of Finance issued new measures aimed at speeding up infrastructure spending. Macroeconomic data was mixed, with the purchasing managers’ index (PMI) – a figure that represents current and future business conditions, in June flat with the previous month at 49.4 while May retail sales were up 2.1% month-on-month.
In terms of regional equity performance, Asia came top, closely followed by Latin America and EMEA (Europe, Middle East and Africa). While Singapore and Thailand led the gains in Asia. The US dollar lost ground against a basket of emerging market currencies. Turkey was the strongest performing market in the EMEA region, followed by Russia and Poland. Opposition candidate Ekrem Imamoglu won the re-run on the Istanbul’s mayoral election with 54% of the vote, ending 25 years of the Justice and Development (AKP) rule in the city. Aside from higher oil prices, Russia’s equity markets also benefited from a reduction in interest rates.
The chart below highlights the performance of the MSCI Emerging Markets (GBP) index over the quarter period to 28th June 2019 and reflects that period of volatility as global trade concerns escalated during May 2019. The Index increased slightly in sterling terms on a total return basis by approximately 0.20% over the Q2 2019 period.
The Bond Markets
It was a positive quarter for financial bond markets with both corporate bonds and government bonds making gains. Broadly, this reflected expectations that central banks would keep monetary policy loose, including the possibility of US rate cuts. At their meetings in mid-June, comments from the Fed and ECB confirmed the growing dovishness among policymakers, with both clearing the way for further policy measures if needed. Government bond yields fell markedly as prices rose. The 10-year US Treasury yield was over 40 basis points (bps) lower over the Q2 quarter period and the 10-year German Bund yield over 25bps lower at -0.33%. There was a pronounced move in the Spanish 10-year yield, which fell 65bps to just above 0.40% as the April general election removed political uncertainty. The UK 10-year yield underperformed, falling by about 17bps. The yield rose in April (i.e. bond prices fell) on the announcement of an extension to the Brexit deadline and resilient economic data.
The government bond charts below reflect the continued downward yield trend seen this year for the 10-year US Treasury and 10 year UK GILT. Data as at 4th July 2019 shows the Treasury Yield trading around 1.95% and the Gilt Yield around the 0.67% mark.
10-year US Treasury Bonds
UK 10 Year Gilt
Corporate bond markets delivered positive total returns and outperformed government bonds. Corporate Bonds drew support from falling yields (bond prices rise when yields fall). Higher quality
investment grade bonds saw better returns than high yield bonds as they tend to benefit more in a falling yield environment.
The global bond sector has thus performed strongly over Q2 2019 as bond prices rose. The chart below shows the sector average total returns over 1 year for all the UK unit trusts and open- ended investment companies operating in the Investment Association Global Bond sector.
Commercial Property
The Q1 2019 RICS UK Commercial Property Market Survey results show conditions remain highly varied at the sector level, namely office, retail and industrial. Solid fundamentals continue to drive growth in the industrial segment while the struggling retail sector shows little sign of improvement. It is fair to say that Brexit uncertainty does continue to weigh on the UK Commercial Property market.
Within the model portfolio proposition offered by Burton & Fisher, one of the core funds used to gain exposure to UK commercial property is a fund provided by Legal & General. Based on latest available data, the fund holds 94 physical properties in the UK, predominantly industrial and office related property. The fund has provided some diversification for the model portfolios in recent times and this is highlighted in the cumulative past performance chart below, whereby the fund displayed a much lower volatility, when compared to equities, as represented by the FTSE 100. That said, the fund is not immune to market events and in certain circumstances, the Fund Manager can impose restrictions on accessing the fund, in order to manage the property portfolio and minimise the need to sell property at a difficult or inappropriate time.
Burton & Fisher continue to support our specialist property fund managers, who we feel can identify those opportunities ahead and allocate to sectors accordingly. These now include commercial
property opportunities overseas, via FCA authorised and regulated funds, domiciled in the UK.
One such new fund is the Schroder Global Cities Real Estate fund and we will report further on this fund as our day to day experiences with the fund management develop over the period ahead. The fund aims to provide income and capital growth over the long term by investing globally in the equities of property companies that the Manager feels will offer sustainable dividend payments. Based on latest available data, the fund has larger weightings in property equities in the US, Australia and Singapore, with smaller weightings in other countries including Canada, France and the Netherlands.
Commodities
After a strong recovery over Q1 2019, crude oil prices adjusted downwards towards the end of May 2019, as global growth concerns escalated, see Brent crude oil price chart below.
During the month of April, the US opted not to extend Iranian oil import waivers to eight countries, requiring them to cease oil purchases from Iran or face US sanctions. This raised concerns over global oil supply and increased the oil price further.
Commodities were hit by global growth concerns in May with both Brent crude and natural gas prices falling. Within Industrial metals, copper and zinc prices were particularly weak. By contrast,
agricultural commodities gained strongly during the month of May. Corn and wheat prices gained as adverse weather conditions in the US increased the risk of yield shortfalls. Precious metals also posted positive returns for the month, underpinned by a rising gold price.
Oil prices drifted lower last week, as weak global data raised concerns about future demand for the commodity despite a positive boost from OPEC’s decision to extend supply cuts until next March. The Organization of the Petroleum Exporting Countries (OPEC) agreed to extend oil supply cuts until March 2020 as the group’s members overcame their differences in order to try to prop up the price of crude.
Over the Q2 2019 period as a whole, Brent crude declined 4.5%, despite a rise in geopolitical tensions in the Persian Gulf. By contrast, precious metals recorded gains, led by gold, which increased by over 9%. The rise in gold price, in particular over the month of June has been supported by the prospect of US interest rate cut(s) and geo-political tensions between the US and Iran. Should the outlook for global growth deteriorate coupled with a weakening US dollar, then this would provide continued support for the gold price.
Burton & Fisher Model Portfolios
With global trade concerns changing week by week, there is the possibility of further volatility in the markets. It is important to have a spread of investments to minimise the investment risk and our model portfolios are constructed in order to give access to a wide range of leading fund managers operating in the different sectors around the world. Typically, our portfolios consist of 15 or more collective investment funds and each fund is monitored on a regular basis, in particular to assess the continued suitability of each fund. This entails monitoring the investment performance and volatility of each active fund, in order to assess that they remain competitive and have that potential to enhance longer term returns.
For example, the cumulative performance of the Burton & Fisher model portfolio 5 over the five- year period to 1st July 2019 is shown below. The portfolio is suitable for a person with a low medium investment risk profile. Whilst not insulated from the volatility seen in markets last year, the portfolio has made a respectable return and has outpaced sectors average over period shown. The FTSE 100 index, which consists of many international companies is also shown for comparison.
Burton & Fisher Model 5 Growth – Cumulative Performance
Unless specified otherwise, the performance figures shown in this report are supplied by FE Analytics and only serve to show how the portfolio and wider markets have performed in the past. The past performance data above is based solely on the current allocation of funds and does not reflect changes in funds and allocation over time. Past Performance is not a reliable indicator of future results and the value of investments is not guaranteed and may go up or down. Returns shown above are after fund management charges, but before financial advice and product charges, other charges and taxes where relevant. Price total return performance figures are calculated on a bid price to bid price basis (mid to mid for OEICs) with net income (dividends) reinvested. Performance figures are shown in Sterling unless specified otherwise.
Asset Allocation
Asset Allocation is based on long-established and well-proven mathematical principles, it involves achieving the correct balance of assets in your portfolio. The universe of investment funds available for you to invest into are categorised under different asset classes depending on their particular focus. Different types of assets have different performance characteristics, so it is very important to allocate the right mixture of funds to your portfolio so that, over time, the peaks and troughs of their performance balance each other out meeting your particular risk and reward expectations.
Burton and Fisher reviews the asset allocation for our clients on a quarterly basis, any changes that we are recommending to the rebalancing of your investment strategy will be communicated to you for your approval. For example, at the previous quarterly meeting held earlier this year, the Burton & Fisher investment committee agreed to reduce exposure to equities in certain regions and reduce exposure to global high yield bonds in favour of global investment grade bonds and in some cases, cash holdings. Each model in our range is different of course and specific changes are discussed in detail as part of our ongoing review service.
The current asset allocation of the Burton & Fisher Model 5 Growth portfolio is shown in the chart below, with approx. 57% of the portfolio invested in equities globally, 23% in bonds globally, with the balance in commercial property and money market cash linked investments.
Source: Dynamic Planner 05.04.2019
Important Information
Burton & Fisher Financial Services is authorised and regulated by the Financial Conduct Authority (FCA) in the conduct of investment business. This document is only investment research and you should not treat this guide as a recommendation to buy, sell or trade in any of the investments, sectors or asset classes mentioned. Some of the market commentary has been provided by a selection of our preferred fund managers.
The value of any investment and the income from it is not guaranteed and can fall as well as rise, so that you may not get back the amount originally invested. Past performance is not a reliable indicator of future results.
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