Global Markets to 10 December 2018
- Global stocks remain turbulent throughout the week as markets experience a roller-coaster ride of mixed performances, anxiety and greater volatility.
- Concerns over a slowing global economy, damage from US-China tariffs and wealth destruction on the markets appear to be affecting US central bank opinions regarding further rate hikes.
- US short-dated Treasury yields invert as fears grow over the possibility of a US recession.
- This has been a difficult year for global equity investors, but the dislocation in asset prices will lead to better investment opportunities over the longer term.
Global Market Summary
The picture was mixed for global equity markets over the past week as the two main factors – the US-China trade dispute and ambiguous signals from the US Federal Reserve Bank – proved too much for risk assets, resulting in many global investors taking shelter in government bonds and cash, the best-performing asset class this year.
The dislocation between the US stock market and the rest of the world since the summer has been overwhelming in recent weeks: Wall Street has finally recognised that the effects of an aggressive trade war with China will impact on US economic growth and corporate profitability. There has already been a softening in the US economy, and the most sensitive sector – US technology – has been significantly impacted in recent weeks.
In fact, Apple has had its worst quarter in a decade. Around US$270 billion has been wiped off its capital value in the last few weeks – more than the total worth of some companies. And yet with very few options, the US stock market is still outperforming the rest of the world.
What may be even more remarkable is how under-owned the US stock market tends to be from a global investor perspective. For many investors, the bias is weighted towards having most of their money invested on their domestic stocks. The UK is no exception. Unfortunately, this has been costly over the long term: the FTSE 100 Index is dominated by banks, mining and oil stocks, but there is very little in technology – the evolutionary sector of the future.
From technology to toothpaste, the US provides investors with phenomenal global giants, such as Apple, Alphabet, Amazon, Microsoft and Facebook, as well as more traditional businesses, such as Procter & Gamble, Colgate-Palmolive and Johnson & Johnson.
An investor with a globally diversified portfolio will be rewarded over the longer term. And having significant exposure to the world’s largest economy and some of the most influential businesses makes complete sense – even in light of the harsh corrections we have suffered in recent weeks.
The trade war between Washington and Beijing has damaged both of the world’s largest economies. But China has suffered the most: there has been a significant slowdown in its economy and its stock market has entered bear territory. The current state of the US stock market seems to have convinced President Trump that tit-for-tat trade tariffs are beginning to hurt the country’s economy and corporate prosperity. It is entirely possible, therefore, that the two countries will come to a practical trade agreement that constitutes a sensible solution for both superpowers.
On the political front, Meng Wanzhou, Huawei Technologies Co.’s Chief Financial Officer, was arrested in Vancouver last week, accused of violating American sanctions on selling technology to Iran. This has created some political tension, with Vice Foreign Minister Le Yucheng summoning US Ambassador Terry Branstad to China.
The US Federal Reserve Bank’s position on further monetary tightening has probably been the most confusing issue for the markets. In recent months, the Fed’s message has been far from straightforward. Initially, it seemed to be adopting a hawkish stance in its statements. But it appears to have become more dovish of late: recent US data, such as the mediocre jobs report, a softening of the economy and the destruction of stock market wealth has put it on the back foot.
Whether or not there will be a rate hike in December, therefore, remains to be seen. A recent comment from James Bullard, CEO of the Federal Reserve Bank of St Louis, suggested that the central bank could delay any hikes until the end of December, citing the recent inversion of the yield curve as a possible harbinger of a forthcoming US recession. However, the period between the start of an inverted yield curve and a significant weakening of GDP can vary significantly; a US recession could therefore still be some time away.
The conundrum that Federal Reserve Chair Jerome Powell now faces is how to communicate the Fed’s decision about December. If the message is confusing, there will be concerns on the markets that something more sinister is lurking within the economy. There are also questions about its stance regarding monetary tightening in 2019: will it be more data-led? The US Treasury market appears to be pointing to a potential US recession, suggesting that inflation will remain subdued. If this is indeed the case, is the Fed’s current tightening programme nearing its end?
We appear to have entered a period in which Washington and the central bank are market-watching – something that Alan Greenspan, former Chairman of the Federal Reserve – was renowned for. It is possible that the weakness on Wall Street, the President’s softening stance regarding trade tariffs and a dovish return by the Fed will all help market sentiment and lead to a period of recovery in risk assets. We are still looking out for the seasonal Santa Claus Rally – which may yet come to pass as the festive season draws near.
In Europe, Angela Merkel congratulated Annegret Kramp-Karrenbauer as the new leader of Germany’s centre-right Christian Democrat Union, while France has seen four consecutive weekends of demonstrations against fuel tax rises, high living costs and a number of other issues. Here in the UK, the Commons will vote on Brexit on Tuesday, with Theresa May warning Tory rebels that the deal being voted down could trigger a general election, meaning a very real risk of no Brexit at all.
It has been a difficult year for financial assets – global equities in particular. But if you are still invested in equities and credit, stay the course: we believe that long-term investors will be justly rewarded. A recent dislocation in asset prices is creating excellent investment opportunities, and while capital preservation is still important in periods of downward momentum, anyone with overweight cash positions can start to take bottom fish in regions and sectors that are truly oversold.
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.
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