Market Update – October 2019
A summary of our current economic and market views
17 Oct 2019
Central banks cut rates as growth weakens
The US Federal Reserve and European Central Bank both lowered interest rates in September. Central banks are responding to slowing global growth, with the US-China trade war a primary concern. The conflict continues, with any signs of resolution quickly followed by new hostilities. This is having a clear impact on global manufacturing, with survey data from around the world suggesting that the sector is contracting.
For now, other areas of economic activity, such as services, are proving more resilient. However, geopolitical risk continues to build and the start of an impeachment inquiry into President Trump introduces an additional source of potential volatility for markets.
Brexit uncertainty rumbles on
The political outlook in the UK remains very uncertain.
If the Government’s alternative Brexit deal is unsuccessful then the Benn Act, in theory, requires the UK to seek a Brexit extension. However, there is speculation the Government may find a loophole allowing it to force through a no-deal Brexit.
The main impact of this drama has been felt in currency markets, with sterling rising as the probability of no deal decreases (or vice versa). UK business investment has stagnated but any resolution should benefit UK equities which have suffered as the uncertainty has persisted.
Investors remain cautious
Overall investor sentiment remains cautious, which suggests the market is not "over bought". We remain invested in equity markets despite the fact that valuations are above their long term averages.
High levels of corporate profitability and low inflation are supportive of higher valuations, but concerns about slowing global growth and political risk keep us from adding to positions. We favour diversification by asset, style and geography to help protect against short-term swings in sentiment. We remain underweight bonds, given that valuations are extremely rich. With yield curves flat across developed markets, there is little incentive to buy bonds with long maturities and we have a preference for "short-duration" instruments.
Where appropriate we include alternative investments in portfolios, as they have attractive diversification characteristics. Cash provides liquidity and security where necessary.