Discerning the timesDiscerning the times

Investment Comment March 2019

February saw markets continue their recovery from the fourth quarter correction of 2018, apart from Japan and Emerging Markets which weakened slightly. The MSCI UK and MSCI EU performed similarly, increasing +2.3% and +2.2% respectively. US markets continued to perform well with the MSCI USA increasing +2.1% on the month. Subdued manufacturing growth and export activity in Japan suppressed performance, with the MSCI Japan down -1.1%. After a stellar performance in January, increasing over 5% on the month, Emerging Markets slipped slightly with the MSCI EM down -0.9%.


In the UK, house prices showed little change, increasing 0.4% year-on-year in February, with market confidence subdued. However, the UK unemployment rate in the fourth quarter of 2018 remained at its lowest level since 1974 at 4% and retail sales in January increased 1% after contracting -0.7% in December. The economy is still experiencing growth with year-on-year GDP increasing 1.4% in 2018 and the outlook for 2019 continuing positive, although the Bank of England downgraded their UK growth expectations to 1.2%, down from 1.7% expected in November, due to Brexit uncertainties and a wider global economic slowdown. The forecast suggests that the Bank will be hesitant to continue its monetary tightening schedule and, at most, increase rates by 25 basis points in 2019.


Brexit negotiations continue, with the most recent development pertaining to a possible extension to Article 50. The UK has recently established an agreement with the US to use each other’s derivatives trading venues and clearinghouses to keep markets resilient and open irrespective of the Brexit outcome. The UK has also agreed WTO procurement membership post-Brexit by joining the Government Procurement Agreement (GPA) as an independent member if leaving the EU without an agreement.


In Europe, the European Central Bank hinted at issuing another round of long-term loans despite signalling monetary tightening in 2018, due to the slowdown in expansion being worse than initially estimated. Brussels reduced the Italian economic growth forecast from 1.2% to 0.2% as well as the outlook for the Eurozone to 1.3% from the previously expected rate of expansion of 1.9% in November. In this regard, the International Monetary Fund revised its 2019 global growth outlook from 3.7% to 3.5% due to these strong downward revisions. Eurozone Manufacturing growth contracted in February, with the PMI manufacturing index declining from 50.5 to 49.3.


Trade negotiations between the US and China have delivered new information about future agreements. China proposed to remedy the imbalance of trade via directly targeted imports from the US, among other remedies, which is estimated to close the trade imbalance within 6 years, and therefore mitigate the need for the US to impose further tariffs on Chinese goods. The list of remedies includes Chinese imports of US agricultural goods, enhancing protection of US intellectual property rights and the government keeping the Renminbi from sliding against the Dollar, which gives Chinese exports an advantage. China is also agreeing to a formal process to ensure both sides comply with the agreed terms and conditions of trade.


Despite the advances made in the negotiations, US economic growth seems to be weakening. GDP growth in the fourth quarter remained strong at 2.6% year-on-year but much slower than the robust figures recorded for the previous two quarters of 3.4% and 4.2% respectively. Private sector output growth regained momentum in the US, driven by a strong uptick in the IHS Markit Business Services Activity Index of 56.2 (up from 54.2 in January), which offset the decline in manufacturing output on the month. Both the Services (56.2) and Manufacturing (53.7) PMI Indices continue to reflect growth.


The Chinese manufacturing sector contracted for a third consecutive month, with the PMI index falling to a three year low of 49.2. Non-manufacturing data dipped to 54.3 from 54.7 in January but remained firmly in expansionary territory. MSCI, the world’s leading equity index provider took another step to integrate China’s domestic A-shares with international capital markets. The MSCI Emerging Markets Index will increase exposure to Chinese mainland shares, which could trigger substantial inflows this year as index funds are obliged to buy the shares. The CSI Index rose 2.2% on the news.


Japan returned to growth in the fourth quarter of 2018, with Japan’s Cabinet Office reporting annualised growth of 1.4% in the three months to the end of December. However, data released this month was not as encouraging. Exports fell 8.4% in January compared with the previous year, China was the biggest contributor to the slump, with exports to the country falling by 17.4% year-on-year. Manufacturing also came in soft, with production contracting for the first time in nearly three years in February. The PMI index fell to 48.9 from 50.3 the previous month.


Indian prime minister Narendra Modi entered full campaign mode earlier this month ahead of elections that must be held by the end of May. This time last year Mr Modi’s re-election seemed a formality, but unexpected wins for the opposition Congress party have thrown doubt upon the popularity of the incumbent prime minister. Although the consensus is that Mr Modi will be re-elected to office, a change in government would likely see markets react badly. Recent weeks have seen hostilities escalate between India and Pakistan in the jointly administered region of Kashmir. The tit-for-tat attacks saw relations take their worst turn since open warfare in 1971, escalating as far as an Indian jet being shot down over Pakistani territory. The captured pilot has since been returned to India as a “peace gesture”, which looks to be a significant step to reducing tensions between the nuclear-armed countries. Due to slowing economic expansion and sharply lower inflation, the Reserve Bank of India cut its benchmark interest rate by 0.25% to 6.25%, as a final push to stimulate growth.


Oil prices moved up slightly over the month due to OPEC-led supply cuts, although concerns around global growth have suppressed these gains. US supply remains strong but ongoing disruption in Venezuela continues to remove barrels from the market.


Global growth expectations for the year remain positive and the market consensus on the probability of a recession is low. The expansion is expected to continue but so is the current market volatility. Without a clear indication of where exactly we are in the business cycle, 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.


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.