Understanding the marketsUnderstanding the markets

Investment Comment April 2019

Sterling denominated returns

of major indices

Q1 2019


Year 2018


Year 2017


Year 2016


Year 2015














World (ex UK)






Emerging Markets






Fixed Interest






Overseas Bonds (unhedged)






Corporate Bonds


















Source: MSCI UK IMI, All Country World Ex-UK, Emerging Markets, UK IMI Liquid Real Estate, Cash Equivalent (GBP 1W LIBOR 1%); BofA ML: Global Broad Market+, Sterling Non-Gilts. Total Return, Sterling adjusted.


Global markets recovered sturdily in the first quarter after a strong selloff in the fourth quarter of 2018. The UK recovered last year’s lost ground and the MSCI All Countries (ex-UK) index returned a similar figure. Both Property and Emerging Markets bounced back in the first quarter after a significant contraction in the fourth quarter last year. Corporate debt continued to improve, returning 4.2% in the first quarter after producing a relatively flat return in the final two quarters of 2018.

In the US, manufacturing activity cooled in March with the IHS Markit Purchasing Managers Index declining slightly from 53 to 52.5, its lowest level since June 2017. The Federal Reserve downgraded their 2019 estimate for economic growth to 2.1%, down from the 2.3% projection made in December, amid a slowdown domestically and abroad. The general market consensus is that the Fed will find it difficult to justify further rate rises this year. This was confirmed by Jerome Powell, Fed Chairman, who announced that interest rates will remain unchanged and signalled no further hikes until 2020.

Economists argue that a potential rate cut is a more reliable indicator of a looming recession than the commonly cited yield curve inversion. No indication of a rate cut has been suggested in the near term and the Fed will probably wait and see if the inversion continues for some time before acting. Despite the slowdown, the US economy is still on track for its longest expansion on record by early summer. Interest rate stabilisation will support the economy in the months ahead with further sustenance to come from positive trade negotiations with China. Trade talks continue to progress. Chinese officials are pressing for the lifting of existing tariffs, but President Trump signalled that these will remain.

In the UK, Brexit negotiations are entering the final stage of discussion but have yet to produce a meaningful outcome in the House of Commons.

The Chancellor issued his Spring statement in March, which offered no surprises or radical policy changes. Phillip Hammond did, however, promise a £26.6 billion ‘Brexit dividend’ should the House of Commons pass Theresa May’s proposed deal.

The spending boost would increase funds to public services and infrastructure and potentially fund tax cuts. Earlier this month the Bank of England warned that a no-deal Brexit will significantly dampen the UK economic outlook, but more recent estimates have been mixed. Both the Chancellor and the Bank of England (BoE) last month remained cautious given the political uncertainties, but stronger than expected economic data provided a boost for the Treasury. UK unemployment fell to its lowest since 1975, with 220,000 jobs added in the fourth quarter of 2018 and the unemployment rate dipping below 4%. Inflation remains stable at 1.9% and retail sales surprised, surpassing an aggregate of economist predictions for a 0.4% decline in February to post a 0.4% rise. The MPC voted unanimously in favour of keeping rates unchanged at 0.75%, while noting inflation figures and slightly improved global economic prospects since the turn of the year. The Bank is set to reconvene on May 2nd but no change in rates is expected.

The European Central Bank’s policymakers have become increasingly concerned with the Eurozone economy and have reduced their projection for gross domestic product growth this year to 1.1% from a forecast of 1.7% just three months ago. Forecasts for inflation were also cut with prices predicted to rise below the ECB’s target rate of 2% for each year up until 2021. The Eurozone PMI Manufacturing Index contracted further in March to 47.7, down from 49.4 in February, due to a strong decline in new export orders. Germany has cut their growth forecast for 2019 further from 1.5% to 0.8% and France announced the launch of a “profound modernisation” of the country’s 5.5 million-strong civil service, characterised by cost-cutting reforms and the loss of 120,000 jobs by 2022.

Italy became the first G7 country to endorse China’s Belt and Road initiative, announcing several agreements worth more than several billion euros, including energy and steel companies. The agreement has alarmed some European Union allies, who are concerned about Beijing gaining access to sensitive technologies and critical transport hubs. Business confidence in China improved slightly with manufacturers more optimistic than service providers for the first time in two years. The IHS Markit Business Outlook survey found that 16% of companies forecast higher business activity over the next year compared to the survey low of 14% in October.

In Japan, to mark the abdication of Emperor Akihito, financial institutions are bracing for foreign exchange volatility and strong demand for cash, as the nation prepares for an unprecedented 10-day holiday. Reported exports fell for the third consecutive month, down 1.2%. Imports also dropped 6.7%, the largest decline since November 2016. Export volumes are expected to remain subdued and drag on GDP growth throughout 2019. Relatedly, the PMI Manufacturing Index remains unchanged at 48.9 on the month, signalling a further downturn, and business confidence remains below the long run average. The economic growth outlook remains flat, with inflation at 0.4%. The Bank of Japan kept interest rates on hold, as expected.

Tensions appear to have de-escalated between Pakistan and India following Indian air strikes, however risks of further conflict remain ahead of India’s elections this month. The country made a strong technological leap after shooting down a satellite in space during a ballistic missile test, which puts the country in an elite group of nations with such capacity, along with the US, Russia and China. This is argued to give India a significant military advantage in a region where China is the dominating force.

Oil prices remained relatively stable over the course of the month, moving up slightly from $65 to $67.50. OPEC and Russia continued to support markets with their ongoing supply cuts, which have effectively been extended to June following the cancellation of OPEC’s scheduled meeting earlier this month.

Given the slowdown in global economic growth, 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. We currently do not see a compelling reason to materially adjust our asset allocation strategy.


Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at the date above, 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.