Investment Comment September 2018
1st September 2018
The US returned as the top global market performer in August, after underperforming Europe (ex UK) in July, with the MSCI USA up 3.3%. Preceded by strong performance in July, European markets contracted, with the MSCI Europe (ex UK) down 1.69%. Further contraction was experienced in Asia and in Emerging Markets, declining 1.02% (MSCI Asia ex-Japan) and 2.7% (MSCI EM) respectively. The UK market deteriorated in August with the MSCI UK down 4.18%.
In the UK, economic growth in the three months to July increased at its fastest pace in a year. Second quarter growth was up 0.6%, largely due to a sharp recovery in retail and construction activity, which increased 2.1% and 3.3% respectively. UK manufacturing activity remains subdued, with the IHS Markit Purchasers Managers Index (PMI) declining from 53.8 to 52.8 in August; the weakest reading in 25 months but still indicative of growth. Average earnings, excluding bonuses, rose by 2.9% in the second quarter, exceeding expectations of a 2.8% rise and up from 2.7% in the first quarter. UK unemployment and inflation rates remained steady at 4% and 2.5% respectively; in line with the Bank of England’s expectations on economic development. The Bank further reported a slowdown in consumer borrowing, citing consumers being more cautious due to forthcoming interest rate hikes. With the existing economic conditions in line with the Bank’s expectations, the Monetary Policy Committee voted unanimously to keep rates at 0.75%.
On the back of strong economic growth of 4.1% in the second quarter, the US continues to flourish under strong macroeconomic conditions. US wage growth has risen at its fastest pace in nine years, as employers continue to increase pay to attract and retain quality employees in an increasingly tight labour market. Average hourly earnings increased 2.9% in August and unemployment held steady at 3.9%; almost at an 18-year low. Inflation cooled in August due to a decline in the cost of medical care and apparel prices. The core consumer price index rose 2.2% year-on-year in August, below the expected 2.4%, and might potentially affect the monetary policy outlook for the Federal Reserve if the slowdown persists. US manufacturing signalled the weakest rise in private sector business activity since April, with the US PMI output index declining from 55.7 in July to 55 in August. However, the reading is still well above the 50 no-change value and broadly in line with its post-crisis average of 55.2.
Despite the recent contraction in European markets, sentiment towards Germany and the eurozone has improved. However, the outlook for Italy remains subdued due to concerns about the possible consequences of the expansionary budget policy plans of the new government. Asian markets continue to be unsettled by the uncertainties surrounding the US-China trade dispute, with the MSCI China Index declining 3.8% in August.
Global growth is expected to peak this year, before easing in 2019 and 2020, as the gradual tightening of monetary policy continues. With the prevailing uncertainty in global markets, we continue to advise our clients on the importance of holding a well-diversified portfolio and taking a long-term view on investment performance.