Investment Comment November 2019
4th November 2019
October proved to be an encouraging month for investors. Geopolitical risks to markets at home and abroad abated; macro data was better than expected; and Q3 US earnings surprised to the upside. Market optimism was apparent in the continued sell off in 10y government bonds across developed economies. However, client portfolio returns were held back by the strength of Sterling, which bounced dramatically on the prospect of a Brexit deal. Despite a Brexit bill not passing into law before the October 31st deadline, Sterling ended the month up +5.4% against the dollar and +3.2% against the Euro, its strongest month in a decade.
US equity markets hit record highs as the MSCI USA returned +2.14% in local currency. Since the Global Financial Crisis US stock markets are now up nearly 400%. The Q3 earnings season also boosted investor confidence; 76% of companies that have reported thus far (356 in total as of 1 November 2019) have beaten analyst expectations. Manufacturing PMI data was also up on September, indicating sector expansion as new order growth accelerated to six-month highs. Services data was marginally down on September but still signalled sector growth. Unemployment was also marginally weaker in October, rising to 3.6%, but non-farm payroll employment increased by 128,000, comfortably above consensus forecasts. Contrary to market expectations, the relatively sharp decline in growth seen between Q1 and Q2 was not repeated in Q3. The first estimate for growth in Q3 came in at 1.9%, only 10bps lower than Q2. Despite growth figures being better than expected, the Federal Reserve still opted to cut interest rates by a further 25bps to a target range of 1.5-1.75%. This cut was widely expected by markets, but after a more hawkish tone from Jerome Powell, most commentators now anticipate rates to be unchanged in December.
The UK was the only major geography, in local currency terms, to be in the red this month with the MSCI UK down -2.1%. Stalemate over Brexit again led to a ‘flextension’ but this time a General Election has been scheduled for 12 December to bring an end to the political gridlock. PMI data was stronger than September’s reading for both services and manufacturing but was still low relative to ten-year averages. The notable improvement in manufacturing data reflected businesses making preparations for Brexit, as inventories of finished goods hit six-month highs. House Price growth remained below one percent for an 11th month in a row but was still positive, at a modest 0.4% YoY.
European stocks climbed marginally, with the MSCI Europe ex UK rising +1.33% in local currency terms. Quarterly growth figures came in at +1.1% for the Eurozone economy, easing concerns around a more dramatic slowdown. France proved resilient to the global slowdown, posting a quarterly growth figure of +0.3%. Spain grew more healthily at +0.4% and Italy, despite being particularly trade-dependent, grew at 0.1%. Germany will report on November 14 but are expected to slightly contract resulting in a technical recession for the country. October inflation for the Eurozone of 0.7% remained well below the ECB’s target of 2%.
PMI data on average across Europe was stronger in October, both on the manufacturing and services front. Survey data for Spain was the weakest out of the major European economies, with services data at the lowest level since September 2018 and the manufacturing PMI hitting a six-year low. The German manufacturing data for October was also poor as the sector entered a tenth consecutive month of contraction. However, factory orders for September did grow 1.3%, spurred by orders from outside the EU. The manufacturing picture was similar in Italy, but services data pointed to the fastest expansion in activity since March. France performed best with both PMIs indicating expansion at a faster rate than September. The data suggests Macron’s initiatives to address workforce participation may be beginning to bear fruit.
Japanese equities continued their recent run, returning +4.88% in local currency. The stimulus of the Rugby World Cup manifested in significant YoY retail sales growth of 9.1% - the biggest increase since March 2014. However, PMI data suggests that the effects of the Rugby World Cup may not be enough to counter-balance the effects of Typhoon Hagibis, the biggest tropical storm the country has experienced in decades. The Bank of Japan elected to leave rates unchanged but sounded concern over trade tensions. The threat of a South Korean liquidation of Japanese corporate assets continues to linger as relations deteriorate. In addition, the collapse in trade with China, Japan’s biggest export market, since November 2018 has prompted calls for renewed economic stimulus. Indeed, the Bank of Japan Governor, Haruhiko Kuroda, at the end of the month called for greater coordination of monetary and fiscal stimulus going forward.
Emerging markets were also buoyant with the MSCI Emerging Markets index increasing +3%. China’s growth slowed to 6% in Q3, the lowest level since 1992, although remaining inside the government’s target rate of between 6% and 6.5%. Recent reports of the US considering rolling back levies on $112bn of goods and the near-term prospect of an agreement on a ‘phase one’ trade deal could mean that Q4 numbers are brighter. PMI data in India for October was relatively similar to September, again indicating moderate expansion in manufacturing and contraction in services. The government will hope that the recent surprise corporate tax cuts, implemented under the government’s policy of ‘Make in India’, will filter through into improved Q3 growth figures. The victory of the populist candidate, Alberto Fernandez, in Argentina’s presidential election did little to restore market confidence in the country. Argentina is on the brink of its ninth debt default and inflation is above 50%.
Weakness in macro indicators globally remains apparent but stock market performance has been robust. In the face of concern over the efficacy of monetary policy, Central Banks are increasingly pushing for governments to deploy fiscal stimulus. Inflation remains subdued globally, suggesting significant scope for such fiscal measures. We continue to have a positive outlook for equity markets but advise our clients on the importance of holding a diversified portfolio and taking a long-term investment view.
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.