Central bank stimulus guides asset prices higher as trade disputes weigh on growth
Asset prices continued their steady ascent, fuelled by the prospect of lower interest rates and renewed central bank asset purchases. US indices made fresh highs as testimony from the Chair of the Federal Reserve reaffirmed the intention to cut rates at the July meeting, with President Trump intensifying pressure on the Bank to act.
Sterling weakness flatters overseas gains
Sterling became the worst-performing major currency over the past year as the implications of a No Deal Brexit under new Prime Minister Johnson began to sink in. This flattered gains in overseas stock markets in sterling terms, with the US rising by over 3%, Japan, Asia and emerging markets by 2%, and the UK and Europe eking out a 1% improvement. Government bond yields held close to their record lows, with lower-quality bond yields continuing to push lower. The Greek 10-year bond now yields less than 2%, compared to 19% in 2015. In a further illustration of this distortion, some high-yield European bonds now have negative yields.
Trade disputes weigh on Asian exporters and German manufacturing
In further evidence of contagion from the on-and-off trade disputes, China, South Korea and Singapore all showed weaker export and growth data. Growth in China, at 6.2% year-on-year, is the lowest since 1992. This is significant because these countries are bellwethers for the health of the Asian economy. The dramatic decline in German manufacturing illustrates the twin uncertainties of future trade with the UK and the possibility of a renewed dispute over tariffs with the US.
The Trump Twitter feed announced tariffs on Mexican and Chinese steel imports and berated both the UK ambassador and the US Federal Reserve Board. More constructively, it heralded a bipartisan deal to suspend the US debt ceiling and boost spending levels for two years, eliminating the risk of the government missing payments as early as September. That would have had severe economic ramifications and shaken confidence in the government, never a good outcome with elections approaching.
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
Monetary easing could prove powerful for asset prices, if not the economy
By the time of publication the US Federal Reserve will have cut interest rates, either by 0.25% or 0.50%. The reaction to this, and any accompanying statement, will be instructive but unlikely to be game-changing. For now, the belief is that markets are re-entering a world where central bank stimulus guides asset prices ever higher. We have already started to see a mixture of income-seeking and speculative behaviour driving lower-quality asset prices to new highs.
This is the longest US economic expansion on record, but low inflation will allow the Fed to cut rates to try to encourage a new global upswing into 2020, which is precisely what President Trump wants. Equally, low and falling inflation across most of the developed world gives central banks the excuse to ease monetary policy, whether for economic or political reasons.
The risks remain. Brexit negotiations are fast approaching the endgame once again. Global trade disputes ebb and flow but on balance seem to be worsening, with the sub-plot of increasing tension between Japan and South Korea. Middle East tensions return to the mix with possible ramifications for the oil price. We see plenty of reasons for caution, and a decent correction at some point, but last time around monetary easing proved to be a powerful tool for asset prices, if not the economy. Our portfolios remain positioned to participate in rising markets but avoid the worst of the volatility when markets fall.
This is the longest US economic expansion on record, but low inflation will allow the Fed to cut rates to try to encourage a new global upswing into 2020.
Gold and silver on a surge
Gold has been on a recent surge thanks to a combination of falling real yields, geopolitical risk and plans by central banks to ease monetary policy. Our holdings in the Merian Gold & Silver fund are currently up 14% in July.
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.
Preference for UK equities
We believe that the UK stock market offers better value than most other markets, and recent official data reporting the first net inflow into UK equity funds for two years may be a sign that others are coming around to the idea.
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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