Market Overview January 2019
2018 ended in turbulent fashion for investors as uncertainty over global growth alongside the acceleration of US monetary policy tightening amplified concerns over whether this could trigger a recession. The ambiguity surrounding future relations between the US and China has also dampened investor sentiment, resulting in reduced growth forecasts for the world’s two largest economies.
Most recently, the US and China have stated that progress has been made regarding a potential trade deal. There will be more negotiations when face to face meetings take place this month and investors will inevitably be scrutinising the detail.
The UK’s future relationship with the European Union (EU) is at a critical stage with Theresa May battling with Parliament to implement her proposed deal. This will be decided in mid-January when the House of Commons vote on the package negotiated by the Prime Minister.
In 2018, China and the US were at loggerheads over the trade imbalance between the two nations. A trade war ‘ceasefire’ was called last month as President Trump agreed to postpone an increase in tariffs and President Xi stated that China would begin to purchase a “very substantial” amount of agricultural, industrial and energy products from the US. This was an agreement that both sides needed, as pressure has been building domestically for a more conciliatory tone.
On 29th December 2018, both China and the US issued public statements signalling positive trade progress. President Trump took to his usual media outlet in the form of Twitter and tweeted that the “deal was moving along very well and that it covered all points of dispute”. China reciprocated by formally stating that they wished to reach a consensus and were hopeful that a mutually beneficial deal could be agreed.
We believe that both nations are beginning to realise that a world based on tariffs and restrictive trade agreements is harming global growth and the current damage to the economy will have a negative effect on the domestic public perception of President Trump and President Xi. US businesses have already lobbied President Trump to put aside his differences with China, indicating that higher tariffs are causing higher costs for American manufacturers - which would lead to price inflation for the US consumer. Trump will already be looking at his strategy to be re-elected in 2020 and has stated on many occasions that he wants his presidency to be measured by strong economic performance and stockmarket success. The ninety-day truce, agreed in the post-G20 meeting in Buenos Aires, ends on 1st March and we are hopeful that a deal can be arranged by this deadline.
The Federal Reserve continued to defy pressure from President Trump as it hiked interest rates in the US for the ninth time in three years. The President has argued that the central bank is countering the positive stimulus he implemented via his tax reforms as the Fed has increased the cost of borrowing for corporates. Jay Powell, the current Chair of the Federal Reserve, is navigating a delicate path as he is having to balance a strong domestic economy against warnings of slowing growth overseas and pressures on equity markets. The central bank has stated that it is monitoring global economic and financial developments and therefore taking into account the pressures presented by current stockmarket conditions. Nevertheless, the Federal Reserve’s defiance demonstrates that the US economy is still robust with jobs, household spending and economic activity all growing strongly.
The UK is scheduled to leave the European Union (EU) on 29th March and the deal negotiated by the Government has still yet to be voted through Parliament. The Commons vote was due to be held on 11th December 2018, but the Prime Minister postponed it once it became clear it would be defeated by a large margin. The vote is now due to take place in mid-January and remains in the balance. The DUP and many Eurosceptic Conservative MPs have concerns over the Irish backstop provisions in the withdrawal agreement because it would leave the whole of the UK in a customs union with the EU until the two sides have put in place a long-term trade agreement. There are fears that the customs arrangement — part of efforts to prevent the return of a hard Irish border — could become permanent. Theresa May has suggested that the backstop will only be used as a last resort and is attempting to alleviate concerns surrounding this. If the deal is rejected, the default position is for the UK to leave in March with no deal unless the government seeks to extend the Article 50 negotiating process or Parliament intervenes to stop it happening.
There were concerns that the populist government in Italy would defy the European Union by committing to spending levels which were above the EU’s target. In October last year, the European Commission raised concerns about the impact of such spending on Italy's debt levels. The Italian government were told to amend their budget or face disciplinary action and fines and, after months of negotiation, a new budget has been agreed. The value of Italy's concessions is understood to be a little more than €10bn (£9bn) and the European Commission has said it will watch closely to ensure the budget agreement is adhered to. This conciliatory response is positive for European stability and markets.
Mario Draghi, the President of the European Central Bank, has acknowledged that he expects slower growth within the Eurozone as data from this region begins to become weaker. Protectionism, weakness in emerging markets and equity market volatility are all pointing towards the balance of risks leaning towards the downside. The European Central Bank has stopped quantitative easing, though Draghi has stated that significant monetary policy is still required to support the Eurozone economy.
Despite discussions between President Xi and President Trump, the effects of the trade war are rumbling on and detrimentally affecting investor sentiment in the region. China’s manufacturing sector contracted for the first time in nineteen months, indicating how lower domestic demand and US tariffs are having implications on the economy. Weaker economic growth has prompted the Chinese government to initiate a series of stimulus measures, as well as discussions around potential tax cuts. These measures could be implemented to help boost the economy and alleviate the effect of the tariffs. However, we believe that the most viable solution is for China to agree a deal with the US to remove the tariffs and restrictive trade barriers with the largest world economy.
Last year, markets were focused on the rhetoric surrounding the trade war between China and the US and consequently, as an agreement could not be decided, volatility ensued. The more conciliatory tone in the latest US and China trade war discussions is good news for investors and we are hopeful that this can be resolved by the time the ninety-day deadline is reached. 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 this year. The UK market continues to look uncertain until the Brexit ambiguity has been resolved. This has resulted in reduced investment flows. We will 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 we believe diversification is key). However, most importantly we will endeavor, on your behalf, to identify fund managers that invest in underleveraged companies with strong balance sheets as we believe that highly indebted companies will be punished in 2019, if there are any unexpected events.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 2nd January 2019, and are subject to change. The update is for information purposes only. Source: Financial Times.