- 1 Data shows the global economy faltered in Q2, stoking fears of a downturn. This was reflected in downgrades to global growth forecasts for both this year and next from the International Monetary Fund (IMF).
- 2 Europe
- 3 Switzerland
- 4 UK
- 5 US
- 6 Asia and emerging market equities
- 7 Commodities
- 8 Looking ahead
Data shows the global economy faltered in Q2, stoking fears of a downturn. This was reflected in downgrades to global growth forecasts for both this year and next from the International Monetary Fund (IMF).
The IMF stressed that risks to growth remain skewed to the downside, with an escalation of trade tensions and a disorderly Brexit cited as major risk factors. Policymakers responded with the Federal Reserve cutting rates for the first time in a decade. Will this be enough to revive global economic fortunes.
Bearing this in mind, the IMF has armed policymakers with the following advice: “Avoiding policy missteps that could harm economic activity should be the main priority “. Global equity markets had their worst month of the year so far in May. Geopolitical tensions increased as escalating trade tensions drew investors back to safe-haven assets. Concerns heightened that a trade war could weigh on a global economy that’s already slowing.
After a positive start to 2019, Q2 GDP data revealed weakening growth across many major advanced economies. Growth in the 19-country eurozone slowed to 0.2% during Q2, half the rate recorded in Q1. This decline was largely due to Germany’s economic woes, as a fall in exports resulted in the continent’s largest economy shrinking by 0.1% .
In September, the European Central Bank (ECB) announced a new stimulus package of measures, designed to prevent the eurozone sliding into recession. This includes restarting its quantitative easing programme in November, with 20bn of bond purchases each month. The ECB also reduced its growth and inflation forecasts. Real GDP growth is projected to be 1.1% in 2019, before gradually increasing to 1.4% in 2021. The ECB commented: ‘The short-term outlook has deteriorated due to weaker confidence indicators and continued global uncertainties.
Beyond the short-term the impact of negative external shocks is broadly offset by the impact of more favourable financing conditions and lower oil prices.’
Manufacturing PMI (Purchasing Managers’ Index) fell to a decade low in July, while the services PMI also contracted. Household spending is likely to be subdued in Q3 as consumers remain pessimistic about their financial situation. Following the EU’s removal of Switzerland’s stock-exchange equivalence on 1 July (which allowed the trading of Swiss shares in the bloc), volumes in the SIX Swiss stock exchange surged. The Swiss safeguard measures averted a major disruption in transactions and trading. Current expectations for GDP growth this year are 1.3% and 1.4% in 2020.
Economic data released during August, showed a slowdown in economic growth during H1 2019. The Brexit saga rumbles on. With the second deadline now a matter of weeks away it remains unclear how things will ultimately play out.
While efforts to negotiate a new Brexit deal are continuing, the current position is that the UK will leave the EU on 31 October with or without a deal. On 24 September, the Supreme Court made a unanimous judgement that the prorogation of Parliament was ‘unlawful’, MPs were ordered back to Parliament the following day.
Political uncertainty has hit business confidence and weakened investor sentiment, presenting a headwind to domestic equities.
In the US, Q2 GDP rose at an annualised rate of 2.1%, significantly below the 3.1% recorded in Q1. With fears of a potential downturn growing, the Fed cut its key benchmark interest rate by a quarter of a percentage point on 31 July, the first reduction in US borrowing costs since 2008. It also signalled a readiness to provide further support if the economic outlook deteriorated further. Weak data on US consumer confidence surfaced in September.
Trade tensions between the US and China continue to weigh on business and market sentiment. Markets were optimistic after Steven Mnuchin, US Treasury Secretary, announced that he and US Trade Representative Robert Lighthizer would meet with Chinese Vice Premier Liu He for trade talks in October.
A recent speech by President Trump to the UN General Assembly, called on nations to embrace nationalism and shun globalism. He also issued a message to China that he will not accept a “bad deal” in trade negotiations.
Asia and emerging market equities
Asian equities have traded lower as the ongoing trade issues impact investor sentiment. The US Treasury branded China a currency manipulator as the yuan hit a decade low. With confidence dented by global growth concerns some Emerging Market central banks reacted by cutting interest rates in Brazil, Russia, Korea, Indonesia and South Africa. Markets with a more domestic focus present opportunity.
Despite attractive valuations and more stable economic growth, Japanese equities have underperformed the global market. As a more cyclical market, the effect of trade tensions has been marked. The Bank of Japan intends to ease policies should conditions worsen.
Gold is currently trading at around $1,520 a troy ounce. Gold is quite clearly still in demand as a safe haven asset in the current market environment. Gold prices have also benefited from the Feds decision to lower interest rates and fears of a currency war between the yuan and the dollar.
Oil prices have recently experienced their biggest percentage spike in almost three decades, following attacks on Saudi Arabia’s largest oil processing plant. The drone attacks knocked out 5.7 million barrels of daily crude production, effectively eliminating the world’s spare capacity. As a result, Brent Crude rose by as much as 20% to above $71 a barrel before stabilising to just over $65. Brent crude is currently trading at around $63 a barrel.
Global growth momentum has slowed in recent months. The trade war continues to cast a shadow over growth prospects while the likelihood of a disorderly Brexit is also causing consternation.
Many investors are getting used to a variety of political, financial and economic factors and learning to look through the ‘noise’ to focus on what really matters. Portfolio diversity holds the key to approaching your investments and managing risk. It is important to think about longer-term timescales instead of focusing too intently on short-term events and market fluctuations. Financial advice is essential to help position your portfolio in line with your objectives and attitude to risk.
It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different jurisdictions. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.