WeeklyWatch – Investors ride the wave of trade optimism

11 November 2019

Stock Take

Investor eyes turn to the US

“Deal or no deal?” has become a much bigger question than that posed by TV presenter Noel Edmunds, with a lot more money at stake. The vexed question was again on investors’ minds this week as they waited for signs of resolution in a deadlock that has cast a shadow over the global economy for nearly 18 months. (For once, it’s not Brexit).

In this case, attention was eagerly on the US and China last week, with investors riding the wave of optimism that followed previous rumours of a trade deal, propelling Wall Street’s three main equity gauges to record highs. Money rushed into equity funds at its fastest rate in almost two years, with the FTSE All World index back near its 2018 record.

However, any hopes of an end to trade hostilities were duly quelled on Friday morning when President Trump denied agreeing to reverse $112 billion of import tariffs in ‘phase one’ of a trade deal with China, claiming he was ‘keen’ to make a deal, but that China needed it more than the US.

Despite this, synchronised easing of monetary policy from central banks around the world – which has increased the likelihood of an enduring period of low interest rates – is helping solidify investors’ appetite for risk. Stimulus measures and progress in the trade war appear to be boosting confidence in equity markets, for now.

Indeed, while the tide may be about to shift in the trade war, headwinds mean the waters may well remain choppy for investors and savers alike. As Michael Joynson, Head of Market Insights at Invesco Asset Management, commented:

“The evidence suggests that the global slowdown we’re experiencing is temporary and will not end in recession. Uncertainties remain like trade, Brexit and geopolitics – but monetary policy stimulus, alongside expectations for some additional fiscal easing, suggest a more favourable outlook for 2020. That is certainly what equity markets are currently discounting.”

Japan announces first stimulus package in over three years

On Friday, Japanese PM Shinzo Abe announced a stimulus package, which he said was necessary following the recent natural disasters and the continuing financial demands of the upcoming Tokyo Olympics. While Toyota bucked the headwinds that are slowing the global car industry with record profits, SoftBank, the country’s biggest tech investor, had another difficult week. The collapse of WeWork has pushed the bank to a $6.4bn quarterly loss – which is likely to frustrate Saudi Arabia, as Riyadh committed $45bn to the bank’s Vision Fund.

Frustrations felt in Saudi Arabia

And it wasn’t just the plight of WeWork that weighed on Saudi Arabia this week – OPEC also cast a long shadow over the country, as it downwardly revised its forecast for global oil demand over both the medium and long-term, citing tough market conditions and “signs of stress” in the world economy. This may prove problematic for Saudi Aramco, whose upcoming IPO depends on investor confidence in oil profitability.

Europe continues to battle trade headwinds

On Thursday, the European Commission downgraded its growth forecast for the Euro area to 1.1%, saying they anticipate that global trade tensions will limit further expansion. While hopes of a US-China trade deal saw European markets hit a four-year high, the region is still battling significant headwinds – not least the uncertainty over the future trade relationship between the UK and the EU. Fears over economic conditions are undeniably growing – with German manufacturing hovering near a seven-year low, tariffs on its car exports may tip the country into recession.

Next six months to prove pivotal for English economy

In contrast, the European Commission’s forecast for the UK was upgraded to 1.4% and the Bank of England turned dovish, keeping interest rates on hold at 0.75% and downgrading growth forecasts for the year.

“If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation,” said Mark Carney, the Bank’s governor, giving a clear signal that the rate-setting committee is prepared to cut rates further if the economy slows. Indeed, two members voted for an immediate rate cut, meaning that the next six months will be decisive.

The Bank’s decision came as the UK’s two main political parties announced their spending pledges, kicking off the general election campaign. Both parties drew criticism for abandoning targets to reduce national debt through a ‘binge in borrowing’, with the Conservatives pledging £20 billion a year over a five-year period, and Labour promising £250 billion in infrastructure investment over the next 10 years. One thing is certain: the winner will have a very difficult job on their hands – ensuring the economy continues to grow, and picks up beyond the 0.3% growth achieved in the third quarter.

The high street continued to suffer this week, as Mothercare and Mamas & Papas entered administration, putting over 2,500 jobs at risk. M&S and Sainsbury’s reported further losses, despite store closures and cost-cutting measures. Flat data for the service sector led analysts to say it was looking ‘lifeless’, while the construction sector is in its deepest downturn for a decade. Things are looking sweeter for global food and beverage supplier Tate & Lyle, whose share price jumped 7% after profits for the first half of the year rose 45%.

Wealth Check

Last week, the Bank of England’s Monetary Policy Committee indicated that interest rate cuts are on the table unless Brexit is resolved. Two committee members voted to cut rates – the first split in over a year.

Schroders have also recently reported the results of its survey of 30,000 people globally, which revealed very optimistic average expectations of 10.7% of annual investment returns over the next five years (although regionally, the was lowest in Europe at 9.0%).

It’s certainly a ‘glass half full’ outlook, but one that is somewhat detached from reality, and indicated that some savers are looking back nostalgically at the double-digit returns of the 1970s, 1980s and 1990s.

Yet, interest rates and bond yields look very different now to how they did back then. The simple truth is that the lower-risk investments and savings accounts that helped previous generations save for retirement will not deliver the returns needed to grow our money.

Accepting that we are in a lower return environment is the first step in ensuring we plan successfully for our financial future. After that, the options are to invest more; invest sooner – to allow the power of compounding time to work, and to take a higher, but still comfortable, level of risk. For further advice, contact your Wellesley adviser.

In the Picture

In this video, Dan O’Keefe of Artisan Partners, Co-manager of the St. James’s Place Global fund, discusses a couple of his semiconductor holdings: Samsung and NXP.

Semiconductors (or ‘chips’) might not sound like part of everyday life, but their widespread usage across almost every industry means they are considered to be excellent economic indicators. Semiconductors can be found in thousands of products we use every day, including computers, smartphones, household appliances and games consoles!

The Last Word

“Sánchez doubled down and failed.”

Ignacio Torreblanca of the European Council on Foreign Relations, on Pedro Sánchez’s early election gamble.

The information contained is correct as at the date of the article.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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