Markets edge higher on trade hopes and dovish central banks
New-year optimism carried over from January, sustained by the belief that US monetary tightening was all but done, that trade talks between the US and China were heading for a positive outcome, and that if the UK did ever leave the EU it would avoid the no-deal option. Global growth outside the US, however, continued to slow.
Equities gain, but manufacturing contracts across major economies
Equity markets rose by 3% to 4% in local currencies, but a strengthening pound reduced these gains by around 1% in sterling terms. Bonds were generally flat on the month.
Global growth outside the US continued to slow, with indices pointing to contracting manufacturing across several major economies, notably Germany, Japan and China. German factory orders fell by 7% compared to a year ago. Purchasing Managers' Index surveys pointed to a UK economy close to stagnation; despite record levels of employment, growth had stalled with the biggest fall in new orders since 2009.
Ongoing Brexit negotiations, votes and amendments produced nothing positive, though UK assets and currency strengthened on the belief that Brexit options now ranged from a partial exit, in the form of Theresa May's Withdrawal Agreement, to never actually leaving.
The Fed resists expectations of a cut while Trump opens new fronts
Members of the US Federal Reserve were at pains to correct investors' perception that "being patient" meant the next move in rates would be down; rather, they were in no rush to make a judgement about changes in policy in either direction. Fed Chair Jerome Powell saw a "favourable economic outlook with some cross-currents," but also said that members were ready to adjust balance sheet normalisation if needed. This was taken positively as hinting at an end to quantitative tightening.
President Trump oversaw ongoing trade negotiations with China, held and then prematurely left peace talks with North Korea, and hit out again at the Federal Reserve for keeping interest rates too high, whilst also claiming that America was booming.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Brexit delay may prove the biggest threat to the UK economy
We hoped that March would present a clearer picture of where the world was heading. Centre-stage, there was potential for the makings of a US-China trade deal to be hammered out, possibly followed by a reversal of previously implemented tariffs, taking pressure off the US consumer. More locally, we could but hope that the array of mid-month votes in parliament would lead to an agreed exit strategy, even though it would take beyond the deadline to address the finer points.
Our view was that the biggest threat to the UK economy would come from a further delay to the Brexit process. For some months the lack of clarity on how, or if, we leave the EU had been the root cause of companies putting investment plans on hold, new business drying up and, more recently, a sharp reduction in hiring intentions. So long as this political intransigence continued, the risk of the economy drifting into recession would increase. Even Brexit in the form of the Prime Minister's Withdrawal Agreement would initially see growth suppressed by the need to run down stockpiles of inventories, built up as a precaution against the no-deal option.
Global economic growth remained sluggish, dominated by concerns over the health of the Chinese economy and, more pointedly, its overwhelming levels of corporate debt. Hopes of an agreed trade deal with the US were tempered by concerns over who Trump would pick his next fight with, German car manufacturers, for example. With subdued inflation and some signs of growth stalling, central bankers were, for now, exercising caution; although cutting interest rates was not on the agenda, the European and US central banks were happy to communicate that they would consider allowing monetary conditions to ease if needed.
A pause, if not easing, in monetary policy, and positive outcomes to a couple of geopolitical hurdles, could see a resumption of the Goldilocks era of slow but steady growth accompanied by low or falling inflation. With cash on the sidelines there was room for a move higher, but with risks in either direction finely balanced we expected volatility to continue.
The biggest threat to the UK economy would come from a further delay to the Brexit process.
During the month we sold all of our property exposure, switching into cash as a precaution against the possible risks associated with a messy Brexit period, rather than reflecting an outright bearish view on the asset class.
Property exposure removed
We sold all of our property exposure during the month, switching into cash for the time being. This was a precautionary measure against the possible risks associated with a messy Brexit period, rather than an outright bearish view on property.
Underweight fixed interest
We remain underweight fixed interest, preferring equities and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.
UK equities remain our preference
In equities, our preference remains the UK, where we think valuations already reflect concerns over an economic slowdown.
Well-diversified portfolios
With so much uncertainty around the world, accompanied by record levels of debt, we believe there is a strong case for running well-diversified portfolios, investing in actively managed funds with sound investment processes.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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