The momentum in global equity markets continued through November with a return on the FTSE World Index of 2.61% to sterling investors over the month. It has to be said that the strength of equity market performance this year has caught most investors by surprise given the backdrop of slower economic growth, US-China trade war and decline in company earnings. As we’ve discussed before ‘policy’, in the form of low or even negative interest rates and further quantitative easing, is largely responsible not least because the traditional alternative, fixed interest, is now eye-wateringly expensive and for many, univestible. Equities have been the only game in town and until something changes, will remain so.
Our weightings are based on sterling as a base currency
Core government bond prices have been declining steadily and yields picking up from their summer lows. Looking out five years there are few interest rate changes priced in to the current yield curve, indicating the lack of any clear views on whether rates will tighten or ease.
UK equity markets posted very healthy returns for the month as the FTSE 100, FTSE 250 and FTSE All Share Indices returned 1.82%, 4.15% and 2.25% respectively. Consumer Staples including British American Tobacco provided a quarter of the total main market performance whilst Materials were the biggest sector contributors over the period. Sterling was relatively flat against the US dollar, following a strong recovery from the lows of 1.20.
The UK Manufacturing PMI fell to 48.9 from October’s 49.6, although still ahead of the estimated 48.3. It has now remained in contraction the seventh consecutive month. New orders and output both shrank whilst new export orders fell at their fastest rate for seven years. Employment dropped the farthest since September 2012 as companies reduced costs and increase efficiencies in the face of ongoing Brexit uncertainty. One of the few silver linings over the month was the fall in input costs for the first time since March 2016, helped by lower global commodity prices and stronger Sterling.
House prices rose at their fastest monthly rate since July 2018, up 0.5% in November according to Nationwide. The annual price rise now stands at 0.8%, up from 0.4% previously. Price rises still remain below inflation of 1.5% and wage growth of 3.6%, meaning owning a house has become more affordable. House price growth has stalled under 1% for over 12 months whereas prior to the referendum in June 2016 annual rises were around 5%.
With the likelihood of a hard Brexit lessened and the recent strength of Sterling, we have increased exposure to FTSE 250 holdings that derive half of their earnings from the UK. At the same time we continue to have the majority of our exposure in larger cap internationally focused companies.
Despite the headwinds of a slightly stronger Euro it was a positive month for sterling investors. The MSCI Europe ex-UK gained 1.48%, which translated regionally into the German DAX returning 1.71%, France’s CAC 1.96% and the Italian MIB 1.14%.
The Eurozone PMI figure rose to 46.9 from 45.9 in October, slightly ahead of the estimated 46.6. Despite the rate of contraction being at the slowest rate for 3 months it still marked the tenth consecutive month of being below the expansionary 50 mark. New orders, exports, output and employment declined over the month; input costs also declined as the prices of metals and plastics fell globally. Confidence across the bloc came in a five month high for all nations, indicating that output could potentially be higher in the next 12 months. Away from the headline PMI figure, there were expansions in Greece and France however Germany remained at the bottom of the individual table.
Inflation for the Eurozone rose to 1% from 0.7% previously. An increase in prices for services, food, alcohol and tobacco helped to push the rate up from a near three year low. The level of unemployment across the region fell to 7.5%, the lowest reading since July 2008.
The equity market enjoyed another strong month, as it traded near all -time high levels. The three key indices all did well, these being the Dow Jones Industrial (+4.11%), the broad based S&P 500 (+3.63%) and the technology – led NASDAQ (+4.10%). Catalysts were growing optimism around the prospects for a conclusive US- China trade deal, and the continuing low interest rate policy adopted by the US Federal Reserve to support growth and, by extension, equity markets. Political factors such as the potential Impeachment of the President were outweighed by positive investor sentiment driven by low interest rates and ample liquidity.
Looking forward, seasonal factors often lead to a rally over the holiday period. However this has to be weighed against other markers such as valuation, which looks relatively high, and the potential downside risk from on-going trade friction between the US and China. Being an election year, 2020 looks to be another year of opportunity and risk for investors.
The International Monetary Fund cut its 2019 economic growth forecast for Japan for the third time this year amid heightened risks of a global slowdown in a statement issued at the end of November. They reduced their long-run growth forecast from 0.9% to 0.8%, predicting that the Japanese economy is set to decelerate to just 0.5% GDP growth next year, matching the country’s potential growth rate.
The proposed solution is that the Bank of Japan should reform its monetary policy by moving their 0% cap on yields from 10-year bonds to a shorter maturity and by reviewing their inflation target downwards.
A shift in the cap on bond yields would, in effect, force the Bank of Japan to concede that it is struggling to induce enough GDP growth to reach their 2% inflation target and that consequently there is a real need to reset stimulus so that it is sustainable for the longer term.
The Japanese economy recorded its slowest growth for a year in the third quarter of 2019 as it expanded at an annualised pace of just 0.2%.
This headline followed reports that Japanese corporate sales fell for the first time in three years in the third quarter of 2019, with China’s economic downturn and lower petroleum product prices having knock-on effects for the wider Japanese economy. Pre-tax profits at companies covered by the ministry’s survey also declined 5.3% to ¥17.32 trillion after a 12.0% drop the previous year.
In terms of notable individual company news, export-oriented firms, including technology giant Sony and industrial robot producer Yaskawa Electric, attracted renewed interest on the back of better than expected Chinese PMI data.
Specialized trader Uchida Yoko jumped 15.55% after the company announced strong earnings for the third quarter whilst publisher Kadokawa and clothing store chain Fast Retailing also delivered strong shareholder returns over the month.
Following a strong start to the month of November, where a ‘phased’ trade deal between the US and China edged closer, the index ended flat for Emerging Markets. With two weeks remaining before the next round of US tariffs kick in on Chinese imports, we can expect to have to navigate choppy political waters for the coming months (at least).
Positive news from China included factory activity expanding at its quickest pace in almost three years, however concerns of a wider China slowdown linger – with the growth in the property sector unlikely to continue at its current pace.
We have moved our internal focus towards more large-mid cap, core, Emerging Market fund holdings. There have been no changes to the asset allocation, which remains in line with benchmark.
Sentiment in the UK Property market has benefitted from the perceived improving political situation. The current prediction of a conservative majority and subsequent chances of a Brexit resolution have been a positive to prices.
There was a pullback in the price of gold in November as some of the years earlier large gains were reduced. This month we reduced our position in the precious metal as we see less scope for lower real interest rates which is a key driver of the price of gold.
The opinions expressed in this communication may differ or be to the contrary of those expressed by other individuals within the WHIreland Group and they are subject to change without notice.
We have issued this communication for information purposes only and it does not constitute financial, professional or investment advice or a personal recommendation, nor does it constitute a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this communication, nor is it intended to be a complete statement or summary of the securities, markets or developments which may be referred to.
Past performance is not indicative of future performance and overseas investments are subject to fluctuations in exchange rates. The value of investments and the income from them may go down as well as up and investors may not get back what they originally invested.
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