General Economic Overview – Quarter 3 2019
The summer can often see limited activity as far as markets are concerned and although we saw an increase in volatility, most regional equity markets were only marginally positive over the quarter. From an economic perspective there was more to digest as the global growth picture appeared to deteriorate in most regions, whilst the US continued to deliver robust data. The US consumer seemed to offer a resilience to the trade wars which fluctuated in intensity across the quarter. The ‘flip flopping’ of messages from President Trump over the tariff situation has certainly been partly to blame for the volatility increases we have seen this quarter in both bond and equity markets, but this is not the only cause. Risk assets were particularly turbulent in August as the US announced new tariffs and Chinese authorities allowed the yuan to weaken against the dollar whilst halting US agricultural purchases. Although dialogue was reopened the two sides seem to be quite far apart with a near term deal unlikely.
The weakest economic growth data is coming from Europe where the central bank (ECB) has had to put forward another support package for the region, lowering interest rates once more to a more negative position, as well as instigating more bond purchases. The slowing of global trade levels is clearly a factor in this downturn as Chinese demand has slowed, particularly in the auto market but also across other sectors and the wider Asian region. The purchasing managers’ indices in various European countries has decreased in many cases to below 50, a further sign of declining expectations from the manufacturing sector. To counter this the US continues to offer positive data with healthy employment figures and improving wages but they are not able to completely shut out what is happening in other regions hence the US rate cuts during the quarter. The US is also seeing muted near term earnings expectations and faltering capex spending from corporates which will work through to market valuations.
Central banks now play a more prominent role in markets than they did before 2009 but they face the difficulty of having fewer levers to pull, given interest rates are so low. With low interest rates and financial volatility, markets have become more twitchy when there are potentially adverse consequences for economic activity. Outside factors also concentrate the minds of investors, such as the recent spike in oil prices after the attack on Saudi facilities in the gulf.
The quarter has been dominated more by political than fundamental economic factors as markets have been sensitive to the levels of uncertainty across the globe. Global economic data has definitely deteriorated outside of the US and this has encouraged more defensive positioning from investors although very few investment groups believe there is likely to be an imminent recession. The current economic cycle has extended much further than expected and this makes it more difficult to position portfolios in the short term. We continue to back equity returns in the long term ahead of other assets classes but recognise that the heightened volatility in markets makes these assets vulnerable to short term sentiment changes and unexpected external factors (such as the recent Saudi oil pipeline bombing).
Please be aware that this material is for information purposes only and is supplied by Rayner Spencer Mills Research, an independent research consultancy. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, Rayner Spencer Mills Research own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. Neither Equium Wealth Management Limited or Rayner Spencer Mills Research accepts any legal responsibility or liability for any matter or opinion expressed in this material.