Central bank policy shifts dominate as political uncertainty drags on
A busy month saw the Brexit deadline extended, eurozone manufacturing activity fall at its fastest rate in six years, and the US Federal Reserve signal no planned rate hikes for 2019. While neither of the two key political issues, US-China trade talks and Brexit, was resolved, a change in policy stance by the world's most prominent central banks proved the biggest factor influencing asset prices.
Equities advance as central banks turn more accommodative
In sterling terms, most equity markets gained between 3% and 4%, while UK bonds rose by 2% to 3%. March saw no resolution to either US-China trade talks or Brexit negotiations, though the underlying rhetoric was taken as marginally positive. The biggest factor influencing asset prices was further evidence of a change in policy stance by two of the world's most prominent central banks.
The US Federal Reserve signalled that it would extend its pause on raising interest rates for 2019 and would lessen the amount of quantitative tightening in May, before stopping altogether in September. The European Central Bank combined cutting its growth forecast for the EU with announcing that interest rates were on hold until at least year-end and that it would provide new cheap funding for the banks. Initially, both moves were poorly received on the argument that things must be worse than thought to prompt these changes. As the month progressed, however, investors took heart from some encouraging data and the prospect of a prolonged period of low interest rates.
Brexit paralysis weighs on growth across the Channel
Brexit paralysis affected growth on both sides of the English Channel. Business confidence in the UK was at its lowest since 2009, with investment and spending either being deferred or cancelled. The rise in manufacturing was dismissed as a build-up in inventories ahead of a possible no-deal Brexit. Meanwhile, Germany witnessed a collapse in manufacturing, although blame for the 8% year-on-year fall in orders was directed more towards the slowdown in China than towards the UK.
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
Equities and bonds send conflicting signals on recession risk
It takes two views to make a market, and at the time these views demonstrated stark disparity between asset classes. Analysis by JP Morgan showed share prices discounting only a 15% chance of near-term recession in the US, compared to a more emphatic 80% probability reflected in US Treasury bond prices. US bond investors also disagreed with the Federal Reserve's indication of one more interest rate hike in 2020; bond markets were already discounting a cut that year.
After one of the strongest starts to the year on record, it was reasonable to expect a pause while investors took stock and pondered the merits of further buying at these levels. Recession, or a slowdown from above-trend growth? The debate continued. The latter applied more readily to the US and possibly China; the former was becoming a concern for Europe and the UK, stagnating amidst the ongoing Brexit bickering.
Growth in the US was slowing as the one-off impact of Trump's tax cuts faded. The President was well aware of this, and of the approaching 2020 Presidential elections, which is why he was increasing pressure on the Federal Reserve to loosen monetary policy immediately. With US-China trade talks apparently going well, though far from concluded, Trump returned to threatening tariffs on European goods, something the EU could well do without.
Cash levels had been rising in anticipation of an end to the current economic cycle and a consequent fall in markets. If central bank policy changes proved to have been in time to arrest the slowdown, then the question was how patient these investors would be, bearing in mind that cash yields next to nothing, before returning to equities. In the near term, some markets needed to negotiate technical resistance levels, after which there was room for a move higher. With risks in either direction finely balanced, we expected bouts of volatility to remain.
Share prices were discounting only a 15% chance of near-term recession, compared to 80% reflected in US Treasury prices.
We made a tactical change to our lower and medium-risk portfolios during the month, while maintaining our broader preference for UK equities and well-diversified strategies.
Bond fund switch on lower-risk portfolios
On our lower and medium-risk portfolios, we reduced the holding in the M&G Optimal Income fund in favour of the Rathbone Strategic Bond fund, which is establishing a solid history of steady performance for a lower level of risk.
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 and yields compare favourably with other asset classes.
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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