November Market Overview 2018
October was a volatile month for investors as concerns around the trade war, rising US interest rates and peaking corporate earnings, all had a hand in spooking global equity markets. This transition may represent an economic shift as markets come to terms with the new environment without the support and liquidity previously provided by the looser monetary policy of central banks.
Broad economic data across developed economies is still strong, especially within the US, which has allowed central banks to tighten monetary policy. The US midterm elections saw the Democrats take the House of Representatives but with President Trump tightening their grip on the Senate.
The Brexit negotiations have now reached the most crucial stage with Theresa May battling with Parliament to implement her deal with the European Union.
Earlier this month we saw the US electorate vote in the midterm elections. Commentators had suggested that this would be the acid test for Trump’s presidency and the outcome of the election would determine whether he could continue with his authoritarian approach. As US voters headed to the polls, analysts were predicting Trump would face the prospect of a divided Congress, which turned out to be accurate as Democrats surpassed the 218 votes needed to gain control of the House of Representatives, with the Republicans achieving the 50 seats required to retain majority in the Senate.
Democratic control of the House raises the prospect of congressional investigations being launched against President Trump. Many Democrats are looking to use this newfound power to examine everything from the president’s tax returns to his relations with the Kremlin.
Looking ahead to the presidential elections in 2020, retaining the Senate was vital for President Trump because it will allow him to continue to appoint conservative judges to federal courts and to any vacancies on the Supreme Court. In addition, many of the Republicans ousted from the House of Representatives were harsh opponents of President Trump’s hardline policies, thereby potentially solidifying the president’s grip on the party.
A withdrawal deal has now been agreed between the UK and European Union (EU). Theresa May has presented this to her cabinet and initially claimed to have the full support from her ministers. 24 hours later, the Prime Minister was faced with five ministerial resignations, including Dominic Raab, the Secretary of State for Exiting the EU. The deal agreed could be vetoed in the Commons by members of her own party, meaning that Theresa May would require the support of an equivalent number of Labour MPs to secure approval. Some Labour MPs have stated that, if they believe the agreement is the best option for the future economic stability of the UK, then they would be willing to rebel against Jeremy Corbyn and back it. It will be fundamentally important to both the political and economic landscape of the UK to see whether these and other MPs choose to tow the party line or stay true to their personal convictions (and those of the constituents they represent) when the deal is brought to Parliament.
Earlier in the year, Italy voted to elect a populist government, namely the Five Star Movement and the Lega Nord, which subsequently formed a coalition. Their first budget provoked concern due to the proposal to keep the deficit at 2.4% of gross domestic product for the next three years, which would bust through EU spending targets. Unsurprisingly, the European Union rejected the first draft budget which threatens to cause deeper rifts between the European Commission and the populists in Rome. This economic stalemate and the stagnation of the Italian economy could cause ripples throughout the Eurozone. The latest economic figures highlighted that the Italian economy slowed in the third quarter. Instead of a modest expansion of 0.2%, growth in the three months to September was just 0.02% — the weakest in four years.
Despite lower growth across the continent, the European Central Bank has signalled that risks to the eurozone economy will not deter it from withdrawing one of the most important parts of its crisis-era stimulus, as it confirmed plans to halt its quantitative easing programme by the end of this year. Mario Draghi stated that he was confident of future broad-based economic growth across Europe and that a resolution with the populist Italian government regarding the budget deficit would be reached in due course. Draghi’s plans to phase out quantitative easing is another example of the global trend that central banks now believe economic fundamentals are strong enough to support corporates.
The trade war is still rumbling on and detrimentally affecting investor sentiment in the region. President Trump is meeting President Xi at the G20 this month and investors are hopeful that some sort of concession can be made between the two largest economies in the world. In the meantime, the Chinese economy has seen a slowdown which has been linked to the renminbi’s depreciation, the trade tariffs imposed by the US (affecting inflows of investment) and increasing concerns about rising debt levels. It is expected that the Chinese government is likely to implement a further loosening of monetary and fiscal policy which will help to boost the economy and combat the effect of the tariffs. We still believe there are pockets of value to be found in the Asian region, especially in some of the well-established technology companies.
The world economy has grown robustly in 2018. The most positive news has come from the US, where tax cuts, government spending and business confidence are supporting employment and investment, suggesting solid growth into 2019. However, this could be affected by whether Trump maintains his majority in the House and the Senate, enabling him to promote and implement his pro-business policies. The UK market continues to look uncertain until a deal with the European Union is achieved, resulting in reduced investment flows. Consumer confidence is high across the US and Europe, encouraging companies to invest, which in turn leads to earnings growth. That said, with the possibility of the trade war continuing, we continue to favour fund managers that have a flexible, active approach, with a global remit, so they can asset allocate across the entire investment world (as diversification is key).
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 19th November 2018, and are subject to change. The update is for information purposes only. Source: Financial Times.