- Economic data has weakened over the third quarter
- Dovish central bank policies have provided a boost
- Equity markets have remained relatively robust
Despite a particularly eventful quarter, with political turmoil and weak economic data at the forefront of investors’ minds, equity markets have remained broadly flat. In an attempt to counter weaker economic data, the Federal Reserve cut rates twice and the European Central Bank announced a new stimulus package, including a rate cut and the relaunch of its asset purchase programme. As a result, bond yields around the world have fallen, which has supported equity markets. Boris Johnson’s arrival as Prime Minister has caused a stir, and the eventual Brexit outcome remains as difficult as ever to forecast.
Economic data over the quarter has generally been disappointing. The manufacturing sector in particular, suffered from slowing global trade, mostly as a consequence of Trump’s trade policy. German manufacturing activity hit a seven-year low, undergoing one of its most marked contractions since 2009. On a more positive note, unemployment in the US remains low and consumer activity has held up well. Indeed, consumer confidence in the US has been resilient in the face of the US-China trade conflict and the continuous commentary emanating from Trump’s twitter account.
In the UK, the arrival of Boris Johnson as Prime Minister, with a cabinet committed to leaving the European Union (EU) on the 31st of October, increased the probability of a no deal Brexit. Boris’ unsuccessful attempts to prorogue Parliament have been officially regarded “unlawful” by the UK Supreme Court. To add to this, votes in Parliament attempting to block Brexit have contributed to fluctuating expectations for the eventual outcome.
Across the pond, President Trump’s trade policy, and his possible impeachment, have been the key talking points. Although, the former continues to be the biggest factor affecting global markets. Trump tweeted that the US would put additional tariffs on $300 billion worth of imports of Chinese goods from the 1st September 2019. He later announced that some of these tariffs would be delayed until mid-December.
Whilst developments in politics and economics have been hitting the headlines, equity market indices broadly ended the last quarter with little changed. However, this disguises some significant shifts within markets. Until September, growth stocks had performed strongly this year, with value-style stocks, such as financials, lagging the market as a whole. With questions over future growth, we saw a rotation out of ‘growth’ and into ‘value’, with income-oriented equity funds outperforming in September for the first time this year.
The key for global investors will be the US-China trade talks and how any developments leak into the wider economy. It seems likely that central banks will remain supportive of markets; any deviation from this trend could disrupt market confidence significantly. Whilst we acknowledge the risks of a pronounced slowdown and the resultant increase in volatility, we continue to have a positive outlook for equities over the long-term. Equities continue to look attractive relative to bonds and will benefit from any progress on a trade deal. However, global growth concerns may increase equity market volatility in the short term.