Market Review August 2019

August is usually quite a quiet month; stuck in the middle of the period that journalists often call “silly season” – a quiet period when there isn’t much to report so there’s more coverage of lighter, perhaps more frivolous stories. Not this year.

Whilst most of the headlines in the UK concerned Brexit, the big story of the month was concerning the continuing trade war between the US and China. The President was on a verbal attack against China which went hand-in-hand with another raft of tariffs. China has hit back against the Trump administration with a drastic exchange rate devaluation hinting willingness for a showdown. Capital Economics went as far as saying that Beijing had taken the fateful step of ‘weaponising’ its currency.

However, it’s reassuring that the G7 meeting in Biarritz ended with Trump expressing confidence that the two sides can reach a deal and calling President Xi Jinping a “great leader” three days after branding him an “enemy.” This reassured the markets rattled by the latest escalation of tariffs. With signs that the US economy and companies are feeling the pinch with job creation slowing across major industries in August, there is renewed hope an agreement could be reached to end the trade war.

It is therefore hardly surprising that on the whole, world stock markets struggled in August with none of the major markets managing to gain ground, however, September has started positively with the monthly Global Purchasing Managers Index bouncing back as the survey posted a manufacturing PMI 50.1 (above 50 indicates expansion). This was warmly received by the markets which had become pessimistic over the outlook for the rest of the year.

UK

Boris Johnson ‘enjoyed’ his first full month as Prime Minister with Brexit dominating the agenda: as what has become the norm, there is a special Brexit section below, so we’ll put that to one side for the moment.

Elsewhere, In an announcement that is highly symbolic of the struggles that the UK high street faces, the FTSE100 is set to lose one of its founding members as it was confirmed that M&S would be relegated from the FTSE100 for the first time in its history on 23rdSeptember when the quarterly reshuffle of the top UK-listed companies takes place. In what may be a sign of the times, M&S may not be the last retail stalwart to find itself in the FTSE 250, with Sainsbury’s, Morrisons and B&Q owner Kingfisher all set to be contenders for relegation in the next reshuffle.

There was a ray of sunshine – literally – as the good weather saw pubs and restaurants post modest monthly growth, although those with the beer glass half empty will point out that restaurant closures are continuing to rise.

There was, though, plenty of news for those who prefer to see their glass as half full as figures for June confirmed that wage growth had reached an 11 year high at 3.9% and that the employment rate was at its highest since 1971.

There was plenty more good news as exports from the UK were up by 4.5% in June, the best performance since October 2016.

Unsurprisingly, the FTSE 100 – along with the world’s other markets – had a difficult time in August, falling by 5% to 7,207. The pound was unchanged in percentage terms, ending the month at $1.2165. However, with UK equities yielding an attractive level of dividends, this should be enough to keep domestic and international investors engaged. UK equities are also being helped by a possible rebound in confidence about the global economy.

Brexit planning

Over the last month Boris Johnson has been in talks with Angela Merkel and Emmanuel Macron. One of his key demands has been the removal of the Irish backstop: ‘do that, and then we can talk about the rest of the Withdrawal Agreement’ seems to be Boris’ chosen line of attack.

His threat has always been that the UK would otherwise leave the European Union with ‘no deal’. However, this threat is subsiding as opposition MPs continue to fight the Government and oppose a ‘no deal’ by seizing control of the House of Commons agenda to make a ‘no deal’ illegal.

As it stands, the likelihood of a  General Election on 14th October is diminishing, with the opposition refusing to agree to an election at this time. With the Prime Minister and Jeremy Corbyn trying to outwit each other, the Brexit process could rumble on for some time.

Europe

Once again, it was hard to find much good news in Europe. The month opened with the news that growth in the Eurozone economy had slowed as German output fell to a six-year low and the manufacturing sector continued to struggle. Germany’s overall Purchasing Managers’ Index was down to a 73-month low of 50.9 as the economy dealt with the US/China trade tensions, the overall global slowdown, weak demand from China and the uncertainty over Brexit.

August saw the return of political uncertainty in Italy – inevitably leading to a sell-off of Italian bonds and a fall in the stock market – as Matteo Salvini, leader of the right-wing League party, called for a snap election. By the end of the month a new government had been formed without Mr Salvini, as the anti-establishment Five Star movement formed a new coalition with the centre-left Democratic Party (PD).

Despite the gloom it was a relatively quiet month on Europe’s major stock markets. In keeping with the majority of world markets both Germany and France were down, but not significantly. The German DAX index dropped 2% to 11,939 while the French stock market fell just 1% to end the month at 5,480.

US

Given its impact on the wider world economy it seemed sensible to cover the US/China trade dispute in the introduction, so this section deals purely with matters domestic.

August started with a spat between the President and the Federal Reserve, as the Fed – as expected – cut US rates by 0.25% to a range of 2% to 2.25% and the President – as expected – said that it wasn’t enough. Federal Reserve Chairman Jerome Powell described the cut as a ‘mid-cycle adjustment to policy’, with Trump responding by demanding ‘an aggressive rate-cutting cycle that will keep pace with China, the EU and other countries around the world.’

A few days later it was announced that the US had added 164,000 jobs in July – well down on the 224,000 jobs created in June but broadly in line with expectations. Unemployment remained flat at 3.7% and hourly earnings were 3.2% up on the same period last year.

Later in the month inflation rose to 1.8% (from a previous 1.6%) thanks to rises in gasoline and housing costs. This, of course, means that the Federal Reserve are likely to be more cautious about future rate cuts, which will presumably not do much for the President’s temper.

By the end of the month the President was back on the attack, confirming that he was planning a new, temporary cut in payroll tax in a bid to further boost the US economy. “A lot of people would like to see it,” said the President.

Wall Street generally likes to see news of tax cuts, but in August there were just too many worries about the trade war with China for the Dow Jones index to make any headway. It was down 2% in the month, closing at 26,403.

Far East

All roads in the Far East led to Hong Kong in August as the pro-democracy protests continued and the authorities became more and more determined to quash them. The month ended with tear gas, water cannons and threats of five-year jail sentences for anyone taking part in the protests.However, with the withdrawal of the Hong Kong extradition bill, renewed support measures for the Chinese economy, and reports that trade talks with the US will resume shortly, there is hope for improved stability. Furthermore, Beijing’s triple-pronged policy response has rekindled the view that its government’s approach is pragmatic, realistic and likely to be effective.

The month had also started with another trade row, albeit on a much smaller scale. Japan has removed South Korea from its list of ‘trusted trading partners,’ citing security concerns and poor export controls. Unsurprisingly, Japanese car sales in South Korea duly slumped.

There are now growing fears that the US/China trade war and general worries about the global economy could push some of the smaller, ‘innocent bystanders’ in the Far East – such as Hong Kong and Singapore – into recession, however, there is a growing likelihood that intervention from China could avert such a scenario.

China’s Shanghai Composite index was down 2% at 2,886 and the South Korean market fell 3% to 1,968. Japan completed a poor month for the region’s stock markets as it dropped 4% to close August at 20,704.

Emerging Markets

It is easy to think that the big story in Emerging Markets was the fires in the Amazon rainforest. The G7 offered Brazil money to combat the fires – which President Jair Bolsonaro immediately rejected as he traded insults with French President Emmanuel Macron.

A topic of perhaps greater long-term significance to the financial markets – and the wider economy of South America – might well be the political and economic developments in Argentina. Both the peso and the Argentinian stock market dropped after a shock defeat for President Mauricio Macri in mid-month primary elections. The peso fell 15% against the dollar, while some of Argentina’s leading stocks lost 50% of their value.

Summary

In summary, the bull case for global equities needs the economic outlook to improve, and the US consumer is unlikely to be the leader. The jobs market is stable, and the global economy needs consumers to maintain their spending to continue to drive growth.

With a record-breaking corporate bond issuance week recently, this could prove positive for the global economy if this is spent rather than used to fund dividends and buybacks. With central bankers agreeing monetary firepower is waning, there could be a distinct mindset change with governments starting to invest in their economies to bolster growth.

Given market concerns over the summer and renewed cuts in interest rates, fixed interest instruments enjoyed strong performance over the period which has benefited all multi asset portfolios.

So, while August and the start of September have been a turbulent time for the global geo political news, the debacle of Westminster has not spilled over into the UK markets where waters appear to be reasonably calm.

In addition, it’s important to remember the broader context in which we are investing and the longer-term evidence of staying invested. From a long-term valuation perspective, the majority of equity markets look reasonably priced or under-priced which could represent an opportunity over the long term. Furthermore, political noise and volatility is expected to continue as it has in the past, although defining political events such a Brexit warrant further consideration and potentially tactical tweaks to investment portfolios. Times like these also highlight the added value of reputable and consistently performing active fund managers, with the FTSE 100 (risk score 100) generating a circa 5.71% return over the last 6 months compared to the current Vizion Wealth Balanced Portfolio (risk score 57) generating a circa 9.13% return over the same period but with a far lower level of risk and volatility.

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The information contained in this article is intended solely for information purposes only and does not constitute advice.  While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.

Posted by Jon Hill

Jon is the Investment Manager at Vizion Wealth as well as being Andrew's direct support. With over 6 years of investment management experience, Jon provides market overview and investment insight to the Vizion Wealth advisers. Jon is a qualified Investment Manager, as well as being a Diploma qualified financial planner having previously worked in a financial advisory support role.

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