Investment Comment June 2019
9th June 2019
The year so far has seen positive returns across global markets in response to the US Federal Reserve’s more dovish tone at the start of 2019. However, even though trade negotiations were expected to move towards a resolution, President Trump announced an increased tariff on Chinese goods to 25% (up from 10%) in mid-May. The tariff was increased as a result of China backtracking on commitments made in the initial negotiation papers. China retaliated by increasing tariffs on $60bn of imports from the US and signalled that their next move could involve the restriction of rare earths. Trade tensions, overall, are taking a toll on global expansion with the OECD projecting growth to slow to 3.2% this year.
In May, global markets declined with the MSCI AWCI All Country Index down -2.7% (GBP, total return). Global manufacturing contracted slightly to 49.8, below the neutral level of 50.0 and slightly down from 50.4 in April. It is hoped that a timely resolution of trade negotiations between the US and China will have a favourable outcome for global market stability. President Trump may require some form of breakthrough on trade to boost support for his 2020 election campaign.
Jobs growth in the US surged in April and the unemployment rate dropped to a 50-year low of 3.6 percent. Annual wage growth of 3.2% came in stronger than expected and manufacturing output (Purchasers Managers Index) remains in growth territory in May (50.5) but declined from the levels recorded in April (52.6). Personal Consumption Expenditure (PCE), the primary gauge for US inflation, recorded a figure of 1.6%, year-on-year, in April. The slight increase in the inflation measure (up from 1.5% in March) might encourage the Federal Reserve to keep interest rates unchanged for a while. The MSCI USA fell by 3.2% on the month.
In the UK, Prime Minister Theresa May announced her resignation to formally stand down as Conservative Party leader on 7 June, triggering a leadership contest. The UK economy grew year-on-year in the first quarter by 2.0%, due to strong consumption and public spending, while the manufacturing sector showed signs of weakness. The recorded PMI of 49.4 in May is a sharp decline from 53.1 in April. However, manufacturers remain optimistic, with almost half expecting output to be higher in a year’s time. The OECD forecast Britain to expand 1.2% this year, up from previous estimates of 0.8%, which matches the forecast for the Eurozone. Despite the subdued performance of the UK market, which saw the MSCI United Kingdom return -2.8% on the month, employment growth remains strong and unemployment low at 3.8%.
Manufacturing output in the Eurozone remain subdued. The Eurozone PMI recorded a figure of 47.7 in May, down from 47.9 in April. Eurozone inflation fell to 1.2% in May from 1.7% in April, below the consensus forecast of 1.3%. Interest rates are expected to remain low and steady in the developed world and close to zero in the EU. Manufacturing activity growth is contingent on global trade developments but even more so on whether the US will impose tariffs on auto imports from the EU.
Despite weakness in emerging markets, with the MSCI Emerging Markets returning -4.0% in May, manufacturing output in China and India continued positively. Chinese manufacturing output remains unchanged in growth territory, supported by an increase in total new orders and an uptick in the rate of new business growth. India recorded the strongest improvement in the manufacturing sector for three months, recording a PMI of 52.7 (up from 51.8 in April), which also extended the growth sequence to almost two years of consecutive months of expansion. With the election of Narendra Modi as the Indian Prime Minister, there is widespread expectation that existing policies will bolster growth, increase infrastructure spending and support farmers’ incomes. However, investors remain concerned about potential Hindu nationalism, with policies making the government more hostile to migrants. The MSCI India Index returned +3.7% in May.
Interest rates in Japan are expected to remain low, with the Bank of Japan continuing its bond-buying programme. Weak demand from Japan’s key trade partner, China, has impacted sales volumes. The Japanese PMI edged lower to 49.8 in May, down from 50.2 in April, but large-firm sentiment improved. The MSCI Japan was reasonably flat on the month, returning -0.7%.
The price of gold hit a two-month high of $1,325, as investors looked for a safe-haven in response to fears of a global economic slowdown. Oil prices dropped 13% in the final two weeks of May. OPEC Plus production cuts are expected to remain in place after the Saudi Energy Minister vowed to “do what is needed” to sustain oil market stability.
The main priority is for countries to resolve trade disagreements in a way that does not raise barriers to trade and further add to global market uncertainty. Despite the downward revision of global growth expectations by the OECD, the anticipated figure of 3.2% is robust and expected to recover in 2020. With ongoing global trade negotiations inducing further market volatility, we continue to advise our clients on the importance of holding a well-diversified portfolio and taking a long-term view on their investment performance. We currently do not see a compelling reason to significantly adjust our asset allocation strategy.
4 June 2019
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.