Investment Update - August 2019

After 6 months of exuberant markets, July saw a pause for breath across most asset classes as politics dominated news flow.

In the UK, Boris Johnson was elected Conservative Party leader and hence Prime Minister. A new Cabinet with a more radical Brexit commitment, and a tough stance on the Irish border ‘backstop’ has made it clear negotiations are perhaps less likely to bear positive fruit on a deal before the deadline of 31 October. No Deal now looks most likely; this is the default position given the Article 50 Act and European Withdrawal Act 2018. The status quo is to leave without a deal if a new deal is not agreed, or there is a change of Government – eg. via a vote of no confidence and a subsequent election - before 31 October.

The continued lack of clarity has weakened sterling, back to $1.21, a level not seen since 2017. However, the weaker pound increases the sterling value of multi-national companies’ ex-UK earnings; reflecting that, the FTSE 100 rose by over 2% through the month, while 10yr Gilt yields fell to 0.6% (and hence prices rose) through July. Businesses reliant on imports (eg. components) will be finding the going somewhat tougher. On the high street, it appears that consumers are less positive about spending, with retail sales contracting for a third consecutive month.

Meanwhile, the US Federal Reserve reduced US interest rates for the first time since 2008. The main US stock market index, the S&P 500, climbed to a record high and at the end of the month had achieved a 20% return since the start of 2019. The dollar continues to strengthen, gaining 4% versus the Pound during the month.

We are in the midst of the US reporting season, with more than half of the S&P’s largest 500 companies having reported by the end of July. Around 75% of those companies have beaten analysts’ earnings estimates so far, but most of this can be attributed to creative accounting, ie share buy-backs. When the number of shares in issue falls, as long as earnings do not fall by the same rate the earnings per share will be higher. Furthermore, earlier pessimistic estimates meant earnings surprises on the upside might be more likely. That said, all is not completely rosy in the US. The economy is slowing, and the purchasing managers’ index (PMI) data implies that the manufacturing sector of the economy is about to contract.

In Europe, Brexit is a secondary concern. Economic data continues to deteriorate; manufacturing data from Germany continued its slide, and business sentiment surveys have now declined to six-year lows. This, along with the nomination of Christine Lagarde to take over from Mario Draghi as ECB leader at the start of November allowed the European Central Bank to imply that more Quantitative Easing and/or interest rate cuts are on the way.

In the Far East, China’s economy occupied investors’ attention as Quarter 2 data indicated a continuing slowdown, but other data on retail sales and industrial production appeared to be stabilising. However, at the time of writing, escalation of the Trade War between the US and China has reintroduced volatility and it remains to be seen how this, and the depreciation of China’s currency will impact markets other than over the first couple of days of August.