Investment Comment May 2019
2nd May 2019
April saw the International Monetary Fund (IMF) announce their third downward revision of global growth expectation for 2019 to 3.3%, a 0.2 percentage point cut to their January estimates. The IMF cites elevated levels of corporate debt, in countries representing 70% of global GDP, as a concern for amplifying any economic downturn and challenge to financial stability. The US-China trade relationship is proposed as the main risk to the global economy. However, fading fears of a global recession, hopes for progress in the US-China trade negotiations and the Fed’s pause on rate rises continued to boost global markets, with the MSCI All Country World Index increasing by +3.3% (GBP, total return) in April.
US retail sales experienced the biggest gain since 2017, driven by sales of cars, petrol and clothing, signalling positive consumer confidence. Headline retail sales rose 1.6% month-on-month in March. US economic expansion of 3.2% in the first quarter came in significantly higher than the consensus forecast of 2.0% and remarkably higher than some expecting a contraction, due to the US government shutdown in January. Expectations that the Federal Reserve will rethink its pause on rate rises due to strong GDP growth are, however, countered by two caveats. The first revolves around numbers embedded in the GDP report which challenge the sustainability of 3% growth. These numbers include potential one-off effects associated with inventory building and accelerated imports by companies concerned about the possible intensification of tariffs on China. The second caveat is that US inflation is well below the 2% target of the Federal Reserve, with Personal Consumption Expenditure (PCE), the Fed’s primary gauge for inflation, currently at 1.5%. The US Purchasers Managers Index (PMI) remains unchanged but the MSCI USA Index outperformed the global index, returning +3.9% in April.
In the UK, Brexit negotiations continue to dominate headlines but without meaningful headway. After granting the UK an initial extension of the Article 50 process until 12 April 2019, the EU approved a six-month extension to 31 October 2019. The UK can leave the EU before this date if the withdrawal agreement is ratified. Given the uncertainty of the outcome, the IMF downgraded its forecast for economic growth to 1.2%, down from 1.5% in January. The National Institute of Economic and Social Research (NIESR) trimmed its expectation for UK economic growth this year to 1.4% from its February forecast of 1.5% but expects growth to pick up to 1.6% in 2020. The NIESR broadly expects a continuation of current economic conditions and the Bank of England to keep rates unchanged until August 2020. Growth in the UK economy exceeded expectations in the three months to February, however. The economy grew 0.3%, despite expectations that Brexit uncertainty would dampen economic activity in the first quarter. However, the official figures contrast with private sector surveys, which are more cautious.
UK inflation came in below expectations in March, remaining unchanged at 1.9% year-on-year, after the decline in the cost of food and video games offset the rise in fuel and clothing. UK retail sales also improved in March, increasing by 1.1%.
Whilst this figure is materially higher than economists’ expectations, Bank of England data on credit cards showed the second-largest jump since the financial crisis in the proportion of lenders reporting more defaults. The figures, which relate to the first three months of this year, raise questions over the sustainability of consumer spending. The UK PMI declined from 55.1 to 53.1 in April but remained above the zero-growth multiple. The MSCI UK Index returned +2.2% on the month.
The pace of Eurozone manufacturing growth slowed for a second consecutive month in April. According to the Eurozone PMI data, manufacturing contracted further, and service sector growth cooled. Strong service sector performance in Germany helped offset a contracting manufacturing sector whilst in France growth stagnated. However, the higher than expected economic growth of 1.2% in the first quarter might indicate the start of economic recovery. Despite the positive data, the ECB President, Mario Draghi, sounded warnings of US tariffs and Brexit to the Eurozone Economy. The MSCI EU (ex UK) Index performed well on the month, outperforming the global market by returning +4.0%.
China reported strong annualised GDP growth of 6.4% for the first quarter but this also represents the slowest rate of growth in almost 30 years. The country issued Rmb1.2tn ($179bn) of local government bonds in the first three months of the year to invest in infrastructure, with hopes of boosting economic activity, and these bonds were complimented by a Rmb2tn value-added tax cut this year aimed at helping corporations and smaller companies cut costs and invest more in their businesses. Manufacturing production on the month experienced growth with the headline seasonally adjusted Caixin Purchasing Managers Index above the zero-growth reading. However, the level dropped relative to the previous month from 50.8 to 50.2 and missed the forecast of 51. While positive data from China helped ease fears of a sharp global slowdown, it has initiated the debate on the sustainability of the continuous stimulus from Beijing.
In India, voting has commenced to determining the nation’s 17th Lok Sabha (House of the People) and will remain open until 19 May. Counting will take place on 23 May. Recent polls seem to favour the re-election of Prime Minister Narendra Modi, which is expected to boost sentiment as this will keep the Government’s existing structural reforms in place. The MSCI India Index has returned 71% since he took office and is up +0.5% on the month.
Oil prices continued to edge higher in April. After a strong rally towards the end of the month, President Trump demanded that OPEC raise output to soften the impact of US sanctions against Iran. These demands triggered a sell-off and placed a temporary ceiling on a +40% price rally since the start of 2019. Washington announced that waivers on imports of sanctions-hit Iranian oil will end this week.
Expectations of global growth remain strong. A continuation of accommodative monetary policy by the US Federal Reserve and favourable trade negotiations with China are expected to help keep global market disruptions at bay. Existing market conditions do not persuade us to make any significant changes to our asset allocation strategy. 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.