Market Overview May 2019
There has been much anticipation in respect to US-China trade negotiations so far in 2019. Donald Trump has stated that he expects progress to be made this month with more face to face meetings scheduled to take place in Beijing. It seems that an agreement will need to be made soon otherwise a de-escalation in talks could quickly follow. In the UK, Brexit discussions paused for breath as the deadline for a withdrawal agreement with the European Union (EU) was pushed back to 31st October. Nearly three years since the UK voted to leave the EU, the electorate will be asked to vote in the European elections on 23rd May, assuming that the Government will not be able to push through their withdrawal agreement prior to this date.
Throughout Donald Trump’s election campaign and his time in office, he has continually voiced his concern around the trade imbalance between the US and China. This constant barrage has led to a series of thorough negotiations to attempt to resolve the differences between the two nations. Originally, political and economic analysts were expecting a deal to be completed by the end of March. However, this never came to fruition as both parties continued to haggle over issues such as intellectual property rights and when the tariffs would be removed. The pace of discussions has slowed as the two countries continue to spar over Chinese commitments to reform their economic system, a process requested by the US to enforce the deal.
The talks are now entering the crucial stages with Steven Mnuchin, the US Treasury Secretary, stating that negotiations are entering “the final laps” and that both sides have the desire to achieve an agreement. Face to face discussions are taking place this month, both in Washington and Beijing, with a view to host a summit with President Trump and President Xi to sign the agreement. We believe that both nations realise that a world based on tariffs and restrictive trade agreements will harm global growth and the damage to the economy will have a negative effect on the domestic perception of both leaders. Trump is already looking at his strategy to be re-elected in 2020 and has stated that he wants his presidency to be measured by strong economic performance and stockmarket success. We are hopeful for a cordial outcome which could help to achieve some market stability.
Economic growth in the US continues to be strong and has defied all analyst expectations. Despite suggestions that there has been a slowdown in global growth, US Gross Domestic Product (a measure of economic growth) rose at an annualised pace of 3.2% where predictions of only 2.3% were projected. This is also an increase from the economic growth figures posted in the final quarter of 2018 which were 2.2%. Improving economic data, more accommodative central banks and hopeful expectations for the US-China trade talks have assisted investor and consumer confidence in markets. This has warranted A&J’s position in allocating a larger proportion of the portfolios into the US.
April saw the European Union grant the UK an extension to their membership of the European Union, with the next deadline set for 31st October. The UK Government have stated that they will continue to push for their withdrawal agreement to be approved by Parliament and they will attempt to do this prior to the European elections taking place on 23rd May. The likelihood of this is very slim as the DUP and many of the Brexiteers within the Conservative party have outright refused to vote for Theresa May’s deal. As a result, it is probable that the European elections will take place this month. The issue of Brexit will be the key focus of this election with voters likely to put party political allegiances aside by electing the party they believe will garner support for their vision of Brexit. Polling has suggested that the Labour party would emerge as the biggest UK force in the European Parliament due to their support for a customs union and there would be a surge in support for Nigel Farage’s Brexit party.
The Eurozone economy is currently struggling with pressures from Brexit uncertainty and the slowdown in global growth. These factors are causing concern for European leaders and the European Central Bank. In addition to this, Donald Trump has stated that when he has completed negotiations with China, he will focus his attention on rebalancing the trade imbalance between the European Union and the US. Trump has long threatened to enforce substantial tariffs on European autos. Trade tensions escalated last year after the US President initiated tariffs on foreign steel and aluminum and the EU retaliated with tariffs on American products. Eventually a bilateral trade deal was agreed in July, though Trump has begun to reiterate his initial concerns.
The Eurozone economy has seen a small pickup in economic growth, and unemployment across the Eurozone is now at its lowest level since 2000. However, Mario Draghi, the President of the European Central Bank, has acknowledged that he expects slower growth within the Eurozone as data from this region is still weak. Pressures from a potential US-EU trade war and political uncertainty 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.
US-China trade tensions are still the sticking point for growth and positive investor sentiment within this region. China’s slowest GDP growth in nearly three decades highlights how the trade war has dampened 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. The more conciliatory tone coming from the US surrounding the trade negotiations is helping to calm investor’s worries in this region and the Chinese economy grew at a faster than expected rate in the first quarter of 2019. We still believe that the most viable solution for growth in this area is for China to agree a deal with the US to remove the restrictive trade barriers.
The US-China talks continue to be protracted but we are hopeful that both world leaders will come to an amicable agreement to provide more certainty within the world economy. Despite the Federal Reserve dampening their outlook on domestic growth, the US is powering ahead when compared with other developed economies and we are still seeing business confidence improve which is supporting investment. The UK market will remain uncertain until the Brexit ambiguity has been resolved. The outlook for Europe is negative at present with Brexit uncertainty and US-China trade tensions being clear factors affecting this, which we believe will continue in the short term. We therefore 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 endeavour, 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 1st May 2019, and are subject to change. The update is for information purposes only. Source: Financial Times.