Investment Comment August 2018
1st August 2018
Europe outperformed global markets in July, with the MSCI Europe (ex UK) index up 4.1%, followed by the US and emerging markets which returned 3.6% (MSCI USA) and 2.2% (MSCI EM) respectively. Asian markets were relatively flat on the month, up 0.65% (MSCI Asia), slightly below UK market returns of 0.87% (MSCI UK).
Growth from Knowledge (GfK), one of the largest market research organisations globally, found UK consumer confidence to have remained in negative territory in July. The general economic outlook for the UK over the next 12 months also weakened, which the organisation ascribes to the difficulty in making accurate predictions with Brexit only eight months away. The UK manufacturing Purchasers Managers Index (PMI) declined in July and came in below analysts’ expectations. Retail sales also declined 0.5% month-on-month in June, following growth of 1.4% in May and 1.3% in April, which drove Sterling below $1.30 for the first time since September last year.
Despite these challenges, the UK economy grew by 0.4% in the second quarter of 2018, up from 0.2% in the first quarter. UK unemployment remains low at 4.2% and inflation remained at 2.4%, as higher transport costs were offset by falling prices for food, clothes, recreation and culture. With a tight labour market expected to drive wage growth, inducing inflationary pressure, the BoE Monetary Policy Committee voted unanimously to raise interest rates from 0.5% to 0.75%.
The US economy continues to be robust and experienced its fastest rate of economic growth in almost four years at 4.1% in the second quarter. Moreover, core inflation, which omits volatile food and energy prices, increased 2.4% year-on-year in July, up from 2.3% in June; the fastest pace since September 2008. However, US wage growth flatlined in July at 2.7%, supporting the decision by the Federal Reserve this month to keep interest rates unchanged at 2%. The statement from the meeting signalled a high probability of a rate rise in September, which will mark the third out of four expected rate rises this year.
Global trade uncertainties, associated with the trade war between the US and China, continue to induce global market volatility, with economists expecting gradually increasing inflationary pressures due to higher expected producer and consumer prices. Despite the trade tension dampening both eurozone and Asian business confidence, both markets experienced growth in the second quarter. Eurostat data show eurozone GDP growth to have improved slightly more than expected at 0.4% and China grew by 6.7%, meeting expectations. Japan also avoided a technical recession in the second quarter, with the economy producing strong growth of 1.9%.
Despite global trade tensions driving uncertainty over the short run, global growth is projected to reach 3.9% in 2018 and 2019; in line with the forecast of the World Economic Outlook (WEO) earlier this year. We see attractive opportunities across global markets and continue to advise our clients on the importance of holding a well-diversified portfolio and to take a long run view on their portfolio returns.