Market update - December 2018

A summary of our current economic and market views

07 Dec 2018

Volatility persists

The turbulence that gripped global equity markets in October continued into November. By the end of the month many major indices, including the S&P500, were only marginally higher than at the start of the year. Anxiety continues to focus on the weakening global economy, along with political uncertainties including Brexit in the UK and anti-Macron protests in France. There has been some respite in the form of a short-term trade truce between the US and China. However, we remain sceptical on the prospects for a longer-term agreement on issues such as intellectual property rights and expect a resumption of hostilities next year. The UK Parliament votes in the coming days on whether to accept the Brexit deal negotiated with the EU, and this key stage in the process is likely to be a source of further volatility for sterling and UK assets.

Signs that growth has peaked?

Major economies continue to grow but momentum is fading. We expect the global economy to post 3.3% growth this year, slowing to 2.9% in 2019 and 2.5% in 2020. The longer-term effects of any trade war between US and China, coupled with an end to the fiscal boost provided by President Trump’s 2017 Tax Cuts and Jobs Act, is likely to hamper growth in the world’s largest economies. While Mr Trump might wish to implement further stimulus, it may be more difficult to do so following the mid-terms in which the Democrats took control of the House of Representatives.

An end in sight to US rate rises

A slowdown in growth is likely to lead the US Federal Reserve to pause its cycle of rate increases in mid-2019. Comments in a speech by Federal Reserve chairman at the end of November were perceived by the market as an indication of a softened stance, and equities rallied as a result. President Trump has criticised the Fed’s rate-setting policy, claiming it poses “a much bigger problem than China”. An end to US rate increases is likely to weaken the dollar which in turn is favourable to emerging market assets, which have suffered during 2018.

Portfolio implications

The likelihood of continuing volatility means we continue to favour diversification, both within equity markets and between asset classes. Continued earnings growth and improved valuations mean that we are comfortable retaining our current exposure to equities. Diversifying assets such as property, infrastructure and absolute return strategies are used in portfolios where appropriate and we prefer cash over bonds in a rising rate environment, and to provide liquidity should volatility provide opportunities for reinvestment.

 

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