Global Market Overview
Following last month’s setback, central banks, in June, once again intervened to bolster market confidence with the Federal Reserve and the European Central Bank both indicating that they were ready to provide the necessary monetary stimulus to shore up faltering economies. “Don’t fight the Fed” is a phrase we have used on more than one occasion and market participants seem to be happy to adhere to this mantra.
The MSCI World index rose 5.56%. Both the FTSE World Europe ex UK index (+6.38%) and the S&P 500 index (+5.97%) outperformed. The MSCI Asia ex Japan index rose 5.55% and the MSCI Emerging Markets index was up 5.21%. The UK was a relative laggard with the more internationally exposed FTSE 100 returning 3.97% versus the 2.91% generated by the FTSE 250 (excluding Investment Trusts). Japan’s equity markets were the weakest with the TSE TOPIX index posting a return of 2.56%.
Despite the weakness in May the second quarter of 2019 was positive for risk assets. This followed a strong first quarter such that developed market equities are up over 17% so far in 2019. Perhaps counter-intuitively safe haven assets such as government bonds, gold and the yen have also done well, though not to the same degree. Bond investors have been pricing in interest rates cuts and the potential for further quantitative easing. If the moves by central banks to ease financial market conditions are successful in preventing an economic slowdown becoming a downturn then adopting a riskier stance by investing in equities is justified.
Economic data in the US continues to be mixed. The latest GDP figure showed that the economy grew 3.1% (quarter-on-quarter, annualised) in the first quarter, revised down from 3.2%. The unemployment rate remained at a 49-year low of 3.6% although June’s data showed a slowdown in the pace of hiring. Average hourly earnings increased 3.1% over the year although this was marginally below expectations of a 3.2% rise. Consumer and business confidence indices weakened with survey data demonstrating that business activity is slowing. The Federal Reserve did not cut rates at its meeting in June but did indicate that policy is likely to be more accommodative in the future with the Chairman Jerome Powell commenting that “an ounce of prevention is worth a pound of cure”. The market now expects more than 0.5% worth of rate cuts by the end of this year whereas previously it had anticipated a 0.5% increase. Investors were also buoyed by hopes for a resumption in the trade talks with China post the G20 Summit and President Trump also “indefinitely suspending” the Mexican tariffs.
European growth continues to be fairly anaemic with first quarter GDP growth confirmed at 0.4% (quarter-on-quarter, annualised). The flash composite purchasing managers’ index (PMI) reached a seven-month high of 52.1 in June. A reading above fifty is positive, but the manufacturing element remained below 50, indicating that it is shrinking. With inflation at only 1.2%, the President of the European Central Bank, Mario Draghi, like his counterpart at the US Federal Reserve, suggested that he too would be prepared to act to stimulate the economy. He does not have the lever of cutting interest rates which are already extremely low but could initiate new bond purchases.
In the UK, Theresa May resigned as leader of the Conservative Party and therefore Prime Minister, taking on a caretaker role as of 7th June. The Conservative Party began the process to select its new leader with Boris Johnson and Jeremy Hunt emerging as the final two candidates by the end of the month. Conservative Party members are now choosing between the two by postal ballot with the result to be announced on 23rd July. Both candidates have said that they would be prepared to countenance a “no deal” Brexit on 31st October although Johnson is considered to be the candidate likely to take a harder line. This appeals to those disgruntled voters who have defected to the Brexit Party and puts Johnson in pole position to win the leadership contest, a view backed up by polls and betting odds. Whoever ends up in Number 10, the parliament still remains opposed to leaving the EU without a deal and is unlikely to vote it through making a general election or second referendum more likely.
Meanwhile, whilst the labour market remains tight with accelerating wage growth and GDP grew by 0.5% in the first quarter, the Office for National Statistics (ONS) revealed that the economy shrank by 0.4% in April, primarily due to a sharp fall in car production, related to Brexit uncertainty. The ONS also reported widespread weakness in manufacturing as the effects from a boost to complete orders and stockpile inventory ahead of the original deadline for leaving the EU on 31st March, faded. The UK Purchasing Managers’ Index slipped below 50 for the first time since July 2016, providing further confirmation of a contraction in activity. The Bank of England has been less dovish than the Fed and ECB but may be forced to become more accommodating if the economic data deteriorates further.
Despite much weaker share price performance than the other major markets over the first quarter, Japan’s economic data surprised on the upside with the Q1 GDP growth rate coming in at 2.1%, quarter-on quarter, annualised, whereas consensus expectations had been for a decline. The detailed breakdown is less encouraging but it does mean that Japan is likely to avoid a technical recession, where an economy contracts for two consecutive quarters. Monetary policy was left unchanged.
Like Japan, the Asian ex Japan index also bore the brunt of worries about global trade wars and underperformed the global benchmark over the quarter. However, the majority of this was driven by China and South Korea where stocks declined. The People’s Bank of China released the minutes of its Q2 monetary policy meeting, in which the Monetary Policy Committee emphasized the need to provide liquidity support in a manger that does not promote the build up of financial risks and does not contribute to excessive credit growth. Separately, the State Council of China decided to reduce taxes and fees for small firms to reduce their operating costs which can be viewed as a supportive measure to help offset the negative impact of the US-China trade wars.
Notwithstanding the weaker performance of China and South Korea, emerging market shares posted a modest gain for the second quarter. As it often is, geopolitics was centre stage with political developments boosted sentiment in Argentina and the re-election of the African National Congress party in South Africa was viewed as positive. Russia performed better than the average country in the MSCI EM index, benefitting from a strong rally in state-controlled oil company Gazprom.
It was a positive quarter for bonds as well as equities, reflecting expectations that central banks would keep monetary policy loose, including the possibility of rates cuts in the US. The US 10-year Treasury was broadly flat in June, posting a 0.05% decline. The FTSE Actuaries UK Conventional Gilt All Stocks index rose 0.16% but was outperformed by corporates with the ICE BofAML Sterling Corporate index rising 1.57%.
The oil price rose by 1.99%.
Performance of RPW Models over one month to 30th June 2019
All RPW models advanced over the month. The RPW Cautious model rose 0.99%, the RPW Moderately Cautious model by 1.62%, the RPW Balanced model by 2.66%, the RPW Moderately Adventurous model by 3.57% and the RPW Adventurous model by 4.43%.
Performance of RPW Models over three months to 30th June 2019
Over the past three months, the RPW Adventurous model has advanced 5.68%, the RPW Moderately Adventurous model by 4.13%, the RPW Moderately Cautious model 2.89% and the RPW Balanced Model by 2.02%. Meanwhile the RPW Cautious Model rose 1.51%.
Performance of RPW Models over one year to 30th June 2019
Over one year, all models have generated a positive return. The RPW Cautious model rose 2.58%, the RPW Balanced model by 2.59% and RPW Moderately Cautious by 2.92%. This is a slight anomaly as we would expect the Balanced model to perform better than the Moderately Cautious in a rising market but the difference is small and we do not expect it to persist. The RPW Moderately Adventurous model rose 3.36% over one year and the RPW Adventurous model was up 3.86%.
(Source: Financial Express Analytics, Total return, gross of fees, as at 30th June 2019).
Please note that these figures are unaudited and indicative. The performance of actual client portfolios may be different. The effect of fees will reduce the returns achieved.
Most funds fared well in June. Blackrock European Dynamic was the standout performer achieving a return of 8.50%. Baillie Gifford, one of last month’s biggest fallers, rose 6.66%. Man GLG Undervalued Assets ended the month in positive territory (+1.71%) but failed to make up all of the losses from May as mega caps outperformed their smaller counterparts. iShares 100 UK Equity index advanced 3.96% whereas our dedicated small cap funds fared less well with TB Amati UK Smaller Companies ending the month broadly flat with a 0.17% return. Weaker returns were also generated by the bond funds with Allianz Gilt Yield, last month’s star performer, holding steady with a rise of 0.22% and the L&G UK Property fund rising a modest 0.25%.
Risk appetite appears to be highly correlated to the pronouncements of central banks with any indication of a relaxation of policy driving investors towards riskier assets. A scenario where both equities and bonds go up, as occurred in the second quarter is unlikely to be sustainable. Currently investors seem to be willing to ignore the weaker economic data on the expectation that the authorities will be able to stimulate sufficient growth to avert a recession. In this scenario investors switch into riskier investments with better growth potential leading to a sell-off in government bonds but if the economic weakness becomes more widespread and the authorities are behind the curve than investors will continue to take refuge in bonds and equities will suffer.
We mentioned last month that this has now become the longest economic expansion in history. However, the chart below neatly illustrates that whilst this up cycle is long in the tooth it has been much more muted than previous ones. A lack of inflation may be one explanation which has enabled central banks to maintain their very accommodative stance. A key risk going forward is therefore expectations of monetary policy and the actions of the US Federal Reserve, in particular. A failure to cut rates this month will spook the markets but any sign that inflation is increasing is also likely to be met with concern.
Investors should continue to maintain diversified portfolios with a blend of defensive and more risky investments. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
16th July 2019