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Global Markets to 12 November 2018


Highlights

  • Global stock markets continue to be buffeted by daily events and directional uncertainties.
  • The US mid-term election results have created a divided Congress. But that is not unusual in US politics.
  • These mid-term election results mean that it will be harder for the US president to push through extra economic stimulus.
  • In the UK, Brexit negotiations rumble on with rumours that an announcement is imminent. But a further cabinet resignation is a blow for the UK prime minister.
  • On the commodities markets, the price of crude oil has entered “bear market” territory after recent significant falls, while gold prices continue to suffer as the dollar remains strong.
  • A focus on company fundamentals rather than political agendas is likely to be the key driver for markets as we enter 2019.

Global Market Summary

Global stock markets took their lead from the outcome of the US mid-term elections, and while the Republicans lost control of the House of Representatives, they did hold on to their majority in the Senate. Following the results, the US markets – including the S&P 500 Index, the technology-focused NASDAQ and the Dow Jones Industrial Average Index – all rallied.

The results may have created a divide in Congress, but that is nothing unusual in US politics. Indeed, it can even have a stabilising affect midway through a US president’s term. Trump’s presidency thus far has been interesting in more ways than one. From an economic perspective, his first year was pro-growth, with his signature policies being deregulation, tax reform and fiscal stimulus.

In the second year, he shifted his focus to policies that have run counter to growth: primarily, protectionism. This change in emphasis resulted in global equities markets reacting in a number of different ways. The US stock market has reacted the most positively. All-time highs have been broken and broken again, with the technology sector benefiting the most from these reforms – companies such as Amazon have reached market capitalisation of US$1 trillion.

The escalation of trade war tensions between the US and China has pushed the Chinese stock market into “bear market” territory, while the emerging markets (and parts of Asia) have suffered from the continued strengthening of the US dollar and threats of future US interest rate hikes. This is likely to continue as these two superpowers impose further tit-for-tat tariffs.

However, with more Democrats now in the House, Trump’s power to push through extra economic stimulus or impose tariffs is likely to be more constrained. There is a distinct possibility that the markets will now react more towards company fundamentals, although that does not necessarily mean that the House will not support the president’s belief in the need for further stimulus.

In the UK, the ongoing Brexit negotiations continue to feature prominently, and last week was no exception. Unfortunately for the UK prime minister, the resignation of transport minister Jo Johnson (brother of Boris) has created further uncertainty, together with concerns that further resignations might follow soon.

This will continue to negatively affect political sentiment up until we know whether the UK has succeeded in securing an orderly or disorderly exit from the European Union in March 2019. But from an investment perspective, the defensive qualities of the FTSE 100 Index are likely to provide investors with a number of opportunities between now and then.

Regarding commodities, the price of crude oil has moved into “bear market” territory. This comes as no real surprise, given that the US has reportedly granted eight countries Iran sanctions waivers, and the rumours that Russia and Saudi Arabia are discussing possible production cuts next year. The probability of further oversupply in the short term is therefore likely to push prices down even further. Similarly, the price of gold has continued to suffer as the dollar has gained further ground following the November Fed meeting.

To conclude, current conditions look set to continue as 2018 draws to a close, with the outcome of the Brexit negotiations and the US-China trade talks dictating most of the market direction. Any sensible resolutions to these issues would likely improve the global growth outlook for 2019. Nevertheless, we strongly believe that the transition from QE to QT is truly under way, and the ability to pick great companies for the long term is now even more important.

Peter Lowman, Investment Quorum, Investment, The Lowdown

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.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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