Market Review September 2018
This article was originally intended as a review of Q3 2018, however, given the market unrest over the past week and the potentially unsettling headlines that have been written, we will start this article with a summary of recent events and our view on the economy as it stands today.
As we entered October, a month known for major market sell-offs in the past, a similar picture began to develop.
So far, we have seen global markets decline off the back of an uncharacteristically shaky US stock market with traders becoming increasingly nervous about the prospect of rising interest rates and a tightening Federal Reserve, alongside warnings from the International Monetary Fund about risks to global economic growth.
U.S. bond markets have also attracted much attention with Treasury yields hitting multi-year highs this week – higher yields mean higher borrowing costs, which is seen as negative for corporates and their stock prices. This combination of bearish tones has caused the S&P 500, which didn’t record a single move up or down of more than 1% during the third quarter of 2018 to slip 4% in just over a week and endure its longest daily losing streak since mid-2016.
Back in Europe, Italy and the U.K. remain in the spotlight in terms of political news, while excessive spending concerns continue to weigh on Italy’s government.
Despite the headline grabbing declines experienced in the last week or so, economically, things remain robust. Global growth hasn’t quite reached the heights seen in 2017, but it hasn’t been bad either. Not too hot and not too cold would be a fair reflection, which is a reasonable place to be. But as we have said before, markets don’t appear to be struggling because of the global economy, but political uncertainty, fears over monetary mistakes and a continued breakdown in globalisation appear to be dominating sentiment.
As at the time of writing, markets appear to be experiencing some respite with the UK and European markets in positive territory with US futures also indicating a positive opening as China reported a 15% increase in September exports when compared to the same month last year.
Quarter 3 Economic Update
Now, as originally planned, below is a summary of how the bond market and the various equity markets performed over the previous quarter.
Q3 provided a challenging environment for both equities and bonds during Q3. Much like the recent weather pattern, cold wins blew in from the US, with Trump escalating the trade war with China, whilst domestically, Brexit uncertainty clouded the domestic market.
A thriving US economy continued to outpace the chasing pack this quarter, as US equities continued to outperform. In September, US wage growth rose to the highest level since 2009 as the jobless claims average fell to its lowest level since 1969. This positivity has filtered through to the shopping malls as US consumer confidence hit its highest level since 2000 supporting retail sales growth of over 7% year on year. All in all, it is no surprise the US stock market continued to thrive given this remarkably strong growth backdrop.
Here in the UK, equities were weighed down by fears of a no-deal Brexit as the inverse correlation between the pound and the export focussed FTSE100 appears to be breaking down. As the deadline for a deal edges closer, investors are perhaps becoming less willing to view the possibility of a no-deal Brexit as a positive for the stock market, even with the sterling weakness that would accompany such an outcome.
From a headline perspective, Europe continues to look attractive, perhaps more so than at any point in the last 6 months. With the business cycle continuing to be accommodative for equities, an oversold environment and the risks from Italy, Turkey and Brexit looking less threatening than a few months ago, the Eurozone should be set to pick up the pace.
The main risk going forward appears to be an escalation of the U.S.-China trade war. Europe has a large trade exposure to emerging markets and could be in the firing line for more automobile tariffs if tensions intensify. Overall, the risks that dominated the past quarter seem to be getting smaller, the economy is likely to beat the low expectations and earnings forecasts have potential for upside revision.
Emerging market (EM) equities continued to struggle in Q3 as fears over tighter US monetary policy and concerns about the potential impact of global trade tensions weigh on the area.
As the Fed continues to raise rates, EM countries with large dollar-denominated debts and significant current account deficits are likely to continue to struggle. In addition, the higher oil price has not been helpful for those EM economies that are large oil importers, particularly those whose currencies have fallen sharply in recent times.
Despite the concerns, the valuation of emerging markets equities appears to be cheap when compared to their long-run history and relative to developed markets.
Fixed income returns have been pretty uninspiring during the previous quarter, with high yield credit outperforming government bonds. Against a backdrop of very strong growth, rising inflation and rising interest rates in the US, it is notable that, while unexciting, fixed income returns haven’t been as bad as some might have predicted.
Year to date, EM debt has been the clear underperformer although it should be noted that the worst performing EM credits make up a small part of the index.
Overall, global growth remains positive but less synchronised than last year. For now, the US stands out as the clear leader in terms of growth. In the near term, the main risk appears to be that the trade conflict will escalate and weigh on business and consumer sentiment. So far there are some signs that this may be happening outside the US, but the US itself has remained resilient. On a positive note, and hopefully a sign of things to come, there has been some progress on the trade negotiation front this quarter with a new NAFTA deal being announced and threats to impose tariffs on US auto imports being withdrawn, for now at least.
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INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.