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Global Markets to 18 March 2019


Highlights

  • Global equity markets rally higher on Brexit news and mixed global economic data.
  • On Wall Street, US stocks record their best week for more than three months.
  • US-China trade talks continue, with promising progress.
  • As the end of March approaches, it’s crunch time for the UK Prime Minister and Brexit.
  • Sterling’s rollercoaster ride continues, sustained by Brexit uncertainty.
  • As the first quarter of 2019 draws to a close, the MSCI World Index has risen by 12%.


Global Market Summary

Global equities enjoy another good week following signs that the political jousting between UK MPs and the government may lead to a softer Brexit; furthermore, mixed European and US economic data has left investors feeling reasonably confident about holding risk assets.

On Wall Street, continuing significant progress made by the leading US and Chinese authorities regarding future trade resulted in US stocks recording their biggest weekly gain in three months. Many global investors are becoming increasingly despondent over regions such as Europe, instead preferring the US economy and its companies. These offer quality and would provide greater safety in the event of any further global anguish.

From a 12-month forward earnings perspective, US equities do indeed look more expensive compared with the rest of the world, with the S&P 500 Index currently trading on around 16.8 times 2019 estimates. But looking back over the past decade or more shows that Wall Street has offered its investors two important dynamics. Firstly, its global leadership over rival countries; secondly, a wider diversification of businesses through its domestic sectors.

It could be that US equities can justify higher valuations since they have considerably better earnings growth prospects than other equities around the world and are global leaders in many sectors, such as technology. This is reflected in the current MSCI World Index, where nine of the ten largest global companies by market capitalisation are American and 62% of the index is characterised by the US.

Although the New York Stock Exchange is now the world’s largest – and is likely to remain so for many years to come –, exchanges such as China’s Shanghai and Shenzhen indices, or India’s Bombay and National Stock Exchange of India are likely to grow significantly over the next couple of decades as they open up to further foreign investment. This may eventually change the global demographics of investment over the long term. However, it is unlikely to have much of an impact in the short term.

As far as current events are concerned, the US-China trade talks are progressing satisfactorily, according to US Treasury Secretary Steve Mnuchin. He said on Thursday that if the two superpowers do reach an agreement, then a trade summit between President Donald Trump and Chinese President Xi Jinping would take place, but not at the end of March, as had been previously suggested.

And continuing with trade deals, Trump has again stated that he expects to enter into a “large-scale” trade deal with the UK after Brexit. Once Britain leaves the European Union, which enters into trade deals on behalf of its members, the UK Prime Minister will commence trade negotiations with the US President, together with the authorities of other countries such as Japan, India and China.

The House of Commons recently voted to take a no-deal Brexit off the table, leading to Prime Minister Theresa May issuing a stern ultimatum: Eurosceptic MPs must back her Brexit deal by 20 March. Any further delay will mean that the UK has to request an extension to Article 50.

Under increasing pressure, the Prime Minister asked MPs over the weekend to make an “honourable compromise”, writing in the Sunday Telegraph that failure to support the deal would mean “we will not leave the EU for many months, if ever”. Mrs May is expected to bring her withdrawal agreement back to the Commons next week for a third vote.

In the meantime, Chancellor of the Exchequer Philip Hammond delivered his Spring statement, focusing almost exclusively on the current state of the economy and outlining the potential impact should Britain not agree a deal with the European Union. He emphasised that the UK economy remained “remarkably robust”, despite Brexit and a slowing global economy. He went on to say that in three weeks’ time, 30 million people would receive cuts to their income tax levies and that the unemployment rate was at its lowest level since 1975.

For a more detailed review of the Chancellor’s Spring Statement, click here.

Regarding the UK stock market, the FTSE 100 (the country’s leading index) has risen by just over 7% this year, while the FTSE 250 is up by just over 12% [capital terms]. A more meaningful indicator of any Brexit outcome may be the recent surge we have seen in sterling, suggesting that a resolution is not far off.

Parliament’s rejection of a no-deal Brexit has made it very clear that in the absence of a deal, we are not prepared to leave the EU. FX traders have therefore reacted accordingly, pushing sterling higher against the US dollar. This trend is likely to continue with the assumption that the “Brexit can” will be kicked down the road for another three months. However, much will depend on what the Prime Minister, MPs and ultimately Parliament do next.

So as the first quarter of 2019 draws to a close, and with almost all global equity markets delivering high single, or double-digit returns, what can we expect next? Much will depend on three factors: the outcome of the US-China trade talks, Brexit and what the Federal Reserve Bank does next with interest rates.

But given that the global equity and FX markets appear to be heralding resolutions to the aforementioned issues, and that the US Treasury market is indicating that there will be no further interest rate hikes in the immediate future, the “risk on trade” could have further to go.

 


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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