An escalating trade dispute sends investors to the safety of bonds
Fears of a renewed and expanding trade war hit equity markets but saw government bonds benefit from a flight to safety. The contest to succeed Theresa May re-opened the prospect of a no-deal Brexit, while forward-looking surveys continued to signal slower growth around the world, with uncertainty over global trade tensions cited as the common theme.
Equities retreat as tariffs escalate across multiple fronts
Shares across developed markets fell by 2-3% in sterling terms; in local currency terms, American and European shares lost a further 3%. Government bonds gained 3%, with the yield on the UK 10-year bond falling below 1%.
President Trump followed through on his threat to increase tariffs on a further $200bn of goods made, or partially made, in China, provoking the Chinese into announcing retaliatory measures. In a busy month for the US President, he postponed a decision on tariffs likely to hurt Europe but announced new measures against Mexico and India.
The contest to succeed Theresa May re-opened the prospect of a no-deal Brexit, seen as the most damaging option for the domestic economy. After faring so poorly in the European elections, it was thought that Conservative and Labour MPs would have little appetite for a general election that year, with the prospect of losing their own seat outweighing the desire to govern.
The Fed signals willingness to act as growth surveys weaken
Economic data was mixed but tended towards forward-looking surveys signalling slower growth around the world. The common theme was uncertainty surrounding global trade tensions and, in Europe, the unresolved Brexit issue, causing subdued activity, order books and hiring intentions. Official inflation numbers remained below target.
The Chair of the US Federal Reserve said the board was monitoring the impact of trade tensions on the economic outlook and would "act as appropriate to sustain expansion." Though a fairly obvious and neutral statement for a central banker to make, markets took heart that the tone was more dovish than previous comments and that lower rates were on their way. One US rate cut by December was fully priced into interest rate markets, with the strong likelihood of an additional cut by year-end.
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
A necessary correction, but real risks lurk beneath the headlines
Stripping out the scary headlines, May's market fall looked no more than a necessary correction after the emphatic bounce from December's sell-off. At the time of writing, equity markets were 1-3% higher than May's nadir, and year-to-date returns in sterling terms ranged from 5% in emerging markets to 14% in the US. We were seeing more frequent emotional overshoots in both directions, paradoxically exaggerated by emotionless robotic trading systems.
None of this is to trivialise very real concerns about the escalating geopolitical fallout or its effect on the world economy. There was a genuine risk of a Twitter-led descent into recession as increasing concerns about Trump's threats to further restrict global trade caused businesses to cancel, rather than defer, investment projects, hiring intentions and new orders. Further, markets were gradually coming alive to the risk that the conflict between the US and China was stretching beyond tariffs and would be harder to resolve than a straightforward trade dispute.
On the plus side, there was a feeling amongst investors that the Fed had their back. Recent comments from the US Federal Reserve persuaded investors that the central bank was more open to cutting interest rates if it felt that economic growth was sufficiently threatened by the evolving trade war. The European Central Bank issued further words of comfort following its monthly meeting, though notably committed to keeping rates on hold rather than reducing them. The risk here was the negative market reaction if central banks failed to follow the path of rate cuts mapped out by optimistic bond markets.
It looked likely that the major political issues would persist for much of the year. The UK would remain mired in uncertainty as Theresa May's successor attempted to negotiate a Brexit deal, with the possibility that further setbacks opened the door to a Corbyn-led coalition. Globally, President Trump's focus was on the 2020 election, suggesting further conflict during the year with resolutions and a higher stock market targeted for 2020. In the meantime, we expected further bouts of volatility.
There was a genuine risk of a Twitter-led descent into recession as businesses cancelled, rather than deferred, investment projects.
We continue to run well-diversified portfolios. Trading in the Woodford Equity Income fund was suspended during the month; the fund was just one of between four and six UK equity holdings across our portfolios, illustrating the value of diversification.
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.
Woodford fund suspension
Trading in one of our holdings, the Woodford Equity Income fund, was suspended to protect the interests of long-term clients in response to heavy outflows forcing sales of underlying assets at prices detrimental to the fund. While Woodford has been a poor performer, other core UK funds such as Liontrust Special Situations, Trojan Income, Unicorn Income and Unicorn Smaller Companies have all been strong performers over the past 12 months.
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. An example is the Gravis UK Infrastructure fund, a unique vehicle which invests in public sector infrastructure and clean energy projects. The fund offers excellent diversification, with a low correlation to equities and bonds, and has an attractive inflation-linked yield above 5%. This fund was up 12.5% over the past year.
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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