Market update – February 2019

Here is a summary of our current economic and market views

04 Feb 2019

Markets stabilise but economic data weakens

January saw some recovery in global equities following the steep declines of December - the UK and US markets ended up by almost 5%. However, investors remain sensitive to any fallout from slowing growth in China and elsewhere, as well as to any progress – or lack of it – in the ongoing trade talks between the US and China. Economic data in Europe continues to disappoint, with growth in the Eurozone of just 0.2% in the last three months of 2018. This has led to general pessimism around the region however valuations do now look more attractive. In Germany the valuation of the Dax is lower today than in pre-recessionary periods throughout history. We do not expect a German recession and believe sentiment is overly negative. 

US rate rise prospects fade as the Fed switches tack

In what some commentators described as a U-turn, the Federal Reserve adopted a strikingly different position towards US interest rates  – describing its stance as “patient” and saying it no longer has a strong bias as to whether the next rate move will be up or down. This reduces investor concerns around rising rates acting as a headwind for growth, and the Fed will probably require to see some resolution of the US-China trade dispute and a firmer inflation trend to push on with rate increases. Conversely, we do not believe the data warrants a rate cut yet.

Signs of China’s slowdown an aid in negotiations?

While the UK approaches its Brexit deadline for leaving the EU, another deadline is sparking even more alarm: the 1 March deadline by which China and US need to reach agreement in order to stave off further tariffs. The last days of January brought some sign of progress – cautiously welcomed by both sides – and markets were cheered. China’s position may be helped by the fact that results from US exporters such as Apple, Caterpillar and processor-manufacturer Nvidia, all out in recent days, highlighted US vulnerability to weakening growth in China.

Portfolio implications

We note weakening economic data but continue to see recent falls in many markets as overdone, and so remain comfortable with our current levels of equity exposure. Bond markets are vulnerable to the reduction in liquidity, although a pause in the tightening cycle in the US is supportive in the short term. We hold cash for capital security and to provide liquidity to take advantage of any opportunities that volatility may provide. Diversification continues to be a key characteristic of our Charity portfolios, reducing risk through the inclusion of alternatives such as infrastructure, absolute return and property where appropriate. Rigorous environmental, social and governance analysis also reduces risk and any potential exposure to controversies. 



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