Global Markets to 04 March 2019
- Global stock markets register healthy gains for the first two months of 2019 which suggests that global investors have regained their appetite for risk assets.
- China’s leading stock market indices continue to rebound following reports of a pick-up in growth and news of an increase to Chinese weightings in the MSCI flagship emerging markets index.
- Wall Street continues to lead the global equity market recovery, with the S&P 500 Index now very close to an all-time high.
- In the UK, the IHS Markit survey, which monitors the outlook for manufacturing, suffers under the shadow of Brexit, coupled with news that another high-end fashion brand is poised to enter administration.
- In the UK’s debt market, gilt yields slide whilst sterling climbs as no-deal Brexit risk recedes and UK domestic stocks out-perform those of more international companies that comprise the FTSE 100 Index.
- As economists begin to ponder their growth forecasts for 2019, the belief is that the global economy will avoid a recession. Consumer confidence, corporate spending and earnings will all remain positive.
Global Market Summary
Clearly, we have seen a change in investors’ risk appetite over the first two months of the New Year, with global equity markets now having rebounded from the dreadful December market lows. The rationale for this change in sentiment is a sudden confidence boost from many of the issues that plagued the stocks markets heavily last year.
Arguably, it could be said that, whilst the global equity markets were negatively affected by central bank policies and global events such as trade war tensions, the fundamentals have remained fairly good with global growth expanding to 3.2 per cent and US corporate earnings up by 25 per cent.
In place of a focus on tighter monetary conditions and hostilities between the two superpowers, the United States of America and China, we are now looking at a more dovish Federal Reserve Bank and an easing of trade war tensions giving the opportunity for further optimism and positive market conditions.
This turnaround in market sentiment could be further enhanced if the Trump administration and the Federal Reserve were to continue down the road of low interest rates and the rescinding of all US-China tariffs. This, in itself, would be seen as very positive for stock markets as lending would remain cheap and because those companies sensitive to a tariff are more likely to raise their 2019 corporate earnings guidance numbers. This could lead to a further boost in confidence for both investors and stock markets. Already, we have seen Wall Street edge closer to its all-time high, as investors become less concerned about events and more cheerful about future outcomes. Furthermore, the subdued backdrop for core inflation allows the US central bank more time to keep interest rates low and investor momentum high.
In China, the Caixin-Markit Manufacturing Purchasing Managers Index has surprised some market watchers after recording a pick-up in February from its January lows. The reading of 49.9 represents only a slight contraction in their economy which was taken as good news, given the US tariffs.
Furthermore, another boost for Beijing came by way of the news that the MSCI is to lift its weighing of China’s so-called “A shares” in its influential emerging markets Index. This continued strategy of increased weighting to China is very important as their domestic stock market continues to integrate with international capital markets. This, in turn, will lead to continual change in global asset allocations, investor demographics, and index tracking products such as exchange trade funds.
The presence of foreign institutional investors in the Chinese A-share market will further strengthen its inclusion into investment portfolios, as perhaps a specific country weighting rather than as part of a wider emerging market asset allocation. By November of this year, the total weighting in the MSCI Index for offshore and domestic Chinese stocks will be around 34 per cent, as a further 253 Chinese large cap, and 168 mid cap stocks are added.
Believed to be a once in a lifetime event, the likelihood that China’s continued adoption of a more free-market mechanism will eventually lead to full index status within the next five to ten years. This is exciting. Currently, the Chinese stock market is experiencing a very strong recovery, up by 20 per cent this year, and with an additional estimated US$46 billion poised to pour into index funds over the coming months, the market is likely to rise further throughout the year.
In the UK, the closely watched Markit’s manufacturer’s survey has fallen to its lowest level in four months and its second lowest since the 2016 referendum. Clearly, the uncertainty surrounding Brexit has already taken its toll on the sector with recent official PMI data suggesting that UK manufacturing is already in recession.
Equally, the news that high-end fashion chain LK Bennett is poised to enter administration is another sign that premium-priced retailers are feeling the cold wind of change. The Company has blamed weaker consumer demand, the high costs involved in restructuring the business and the increased cost of sourcing materials from the US due to the weakness of sterling since the Brexit vote.
The disruption of technology and the change in consumer buying habits are more likely to create further downward pressure on this business. We are likely to see more of these types of companies come under pressure over the next few years. Furthermore, Ocado created a wave of customer horror as it announced that it would be changing its allegiance from selling Waitrose products to those from Marks & Spencer from next year.
As Prime Minister Theresa May continues to battle Brexit with both Parliament and the European Union, UK assets are very vulnerable to further high levels of market volatility. Clearly, Parliament has already expressed its very strong concern about leaving without a deal, and so, the PM’s likely options are now the deal in its current form or an extension of Article 50, with the latter being the most likely outcome.
Looking at the UK financial markets, we have seen UK Gilts suffer their heaviest sell-off since autumn 2017; admittedly both US Treasuries and German funds have suffered a similar fate but for different reasons. At the same time, sterling has climbed against a basket of leading global currencies, reaching its strongest level against the euro since May 2017.
At the same time, we appear to see a decoupling of performance from those UK domestic stocks perceived to be less affected by Brexit, the FTSE 250 Index, than those listed in the blue-chip FTSE 100 Index that are more sensitive to the direction of the pound. Admittedly, this can change very rapidly dependant on the final direction of Brexit and the effects that it will have on the UK voter and on sterling.
And so, as we enter the month of March, will the euphoria in the current markets continue to push them even higher? Clearly, global growth has been harmed by the trade war tensions of 2018 and the slowdown of important domestic economies such as China, but we firmly believe that the world economy will avoid an outright recession. Consumer confidence, spending, and the corporate sector still remain positive. Also, a more tentative US central bank and the recent easing of US-China trade war tensions must all be good news for the global economy.
Whilst we should expect economists to downgrade their global growth expectations for 2019, it is likely that this may be just a bump in the road and that forecasts for 2020 might be upgraded further, especially if the United States and China sign a trade deal later this month.
Therefore, equities still remain our asset class of choice, but, selectively, as we see better pockets of value in Asia and the developing markets, over those of the developed world. Equally, I am sure that as the year unfolds, the latter will create some interesting investment opportunities.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
Views: 1,100 views