Global Markets to 17 December 2018
- Global equity markets are weaker following disappointing economic data and concerns about the future outlook for global economic growth.
- In the UK, Prime Minister Theresa May survives a vote of no confidence from her own MPs but now faces an uphill struggle to push through her Brexit deal in the House of Commons.
- With signs that consumption growth is slowing rapidly, will the leading central banks need to re-visit their proposed monetary tightening programmes and slow them down, or indeed, introduce rate cuts?
- We are broadly positive regarding global equities going into 2019 but maintain a defensive position as far as bonds are concerned. However, an ever-changing world makes thematic investing interesting.
Global Market Summary
Financial markets have had to embrace many changes over the year. They were initially positive about the global growth outlook, continuing falls in unemployment rates, a resilient consumer and the overall feeling that the bull market would continue for some time to come. But as the year has worn on, ever-increasing problems have resulted in confidence completely evaporating and in risk asset prices – such as equities – falling sharply.
Since October, most global stock markets have seen significant losses: worries over trade wars, rising interest rates and political turmoil have all taken their toll, resulting in meaningful corrections in financial asset prices. The consequences of Washington’s and Beijing’s tit-for-tat tariffs have gradually wormed their way into the global economy and corporate balance sheets, while mixed messages from the Federal Reserve Bank have shaken the markets, leading to widespread uncertainty about how quickly US interest rates will rise, and by how much.
This has affected investor sentiment in recent months: investors have adopted a “risk off” position as stock markets have fallen and negative events unfolded. Elsewhere, consumers and households now have to face the possibility of higher interest rates and costs, and so many seem to be adopting a policy of purchasing what they need, rather than what they want.
Admittedly, consumer trends are undergoing rapid change around the world as disruptive technologies alter consumer spending habits and the high street falls prey to online shopping. This is having a devastating effect. In the UK, for example, some analysts fear that the high street this year could face its quietest Christmas since the credit crunch. Brexit – and all the uncertainties as far as its outcome is concerned – has also taken its toll.
Within all the turmoil of Brexit, Prime Minister Theresa May had to face a vote of no confidence from her own MPs last week. Although she won the vote by 200 to 117, many in her own party, as well as those in opposition parties, view this result as nothing more than a stay of execution. She is, however, immune to any further leadership challenges for a twelve-month period – some wriggle room within which to manage her own party and get the Brexit deal through.
But given that she has both opposition parties and dozens of her own MPs against her, this is certain to be an uphill battle. As far as the future is concerned, Mrs May has promised to stand down before the next scheduled general election (2022) as part of a last-minute pitch to her own MPs.
The government has made it abundantly clear that it is opposed to a second referendum: although the results were extremely close (51.9% vs. 48.1%), the public made its choice in the 2016 vote. But if the deal is indeed voted down by Parliament, the Labour Party may very well back a no-confidence motion and call for a general election, given just how unlikely it is that the European Union will give any further ground on the existing deal.
A no-deal Brexit would be bad for both the UK and the European Union – it would create numerous difficulties for financial assets, businesses, the Bank of England and the lives of people in the UK and across Europe.
A look at the wider global landscape shows a year of two halves. The world’s global markets – excluding the US – suffered for the first six to nine months from tariff announcements, rising interest rates and a stronger US dollar. Since October, however, Wall Street has been playing catch up, feeling the pain caused by a deep market correction that has been very much technology-driven.
The alleged slowing-down of the US economy and those mixed messages from the Federal Reserve Bank have caused panic on the markets in recent weeks, leaving all three of America’s leading indices down by 10% or more from their earlier peaks. These levels are far more in line with other international markets, leaving the overall performance of the MSCI World Index for 2018 rather disappointing.
Nevertheless, now that asset prices have adjusted themselves to levels significantly lower than a year ago, many markets and individual stocks are offering investors much better value than previously. This means that there is potential for gains from any unforeseen positive surprises – even on this ageing bull market.
Navigating through the last couple of weeks of 2018 and into 2019 will be challenging for investors. However, we are still relatively optimistic as far as the outlook for equities is concerned – even in light of the recent deterioration in economic fundamentals, uncertainty surrounding the outcome of US monetary policy tightening, the trade war and Brexit.
Regarding the actual equity markets, the emerging markets, Asia and Japan are beginning to look extremely interesting at these levels. And as far as sectors are concerned, the sharp fall in technology stocks, defensive qualities from healthcare businesses and the rising number of global consumers will continue to offer good long-term 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.
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