Market Commentary – April 2019

UK markets mark time as Brexit is delayed

UK equities, which have been ahead of their EU counterparts for much of the past six months, underperformed the Eurozone in April, as Brexit was delayed until 31st October, with no indication of what comes next. As Theresa May entered into talks with the Labour Party, to try to find a compromise deal, speculation turned to her possible resignation and other scenarios to resolve the domestic political deadlock that is preventing a deal with the EU.

Underlying data points to stability in US economy

Investors who might have been concerned about the slowdown in US GDP into the end of 2018 took heart from the data published in April. GDP picked up in the first quarter of this year, and was accompanied by falling unemployment and robust consumer spending. Whilst US equities were eclipsed by Japan during the month, they nevertheless gave a strong positive return.

Europe avoids recession as consumers keep spending

Manufacturing data across the Eurozone remained weak, but showed signs of recovery during the month, whist falling unemployment and resilient consumer spending alleviated some of the causes for concern across the continent, and suggested that the Eurozone, as a whole, may avoid a recession. Against the backdrop of weak global sovereign bonds, there was some selective buying in weaker Eurozone issues, such as Spanish and Greek government bonds, whilst across the majority of the developed markets, yields rose as investors adopted a more risk-on mind set.

Emerging markets see solid gains as China growth stabilises

Markets were positively surprised in April by Chinese GDP growth, which at 6.4% year-on-year, exceeded expectations. With concerns over growth potentially fading, Chinese authorities may be set to shift focus back towards structural reforms, rather than emergency economic stimulus. A statement from the Politburo meeting held on 19 April indicated China will further “supply-side reforms” and “structural deleveraging”. Meanwhile comments relating to stabilisation of employment, which had featured in prior statements, were removed.

Equity markets were strong once again in April, with Japan seeing a particularly strong rise of 5.0% leading into the Golden Week holiday, extended this year to encompass the installation of the new Emperor. This also meant that the Japanese markets closed for the month on Friday 26th April. Eurozone shares also performed well, as GDP data seemed more positive than manufacturing figures might have suggested. Emerging markets overall gave a modest return of +2.0%.

European equities saw a strong upward move in April, led by Germany, as economic data showed poor manufacturing numbers being offset to some degree by buoyant consumer spending and falling unemployment. The UK, which has been among the top performers in recent months, lagged behind the major EU markets in April, as the Brexit deadline of 29th March passed, and investors were left in limbo, with no guidance as to what may happen next. Once again, developed Europe drove the positive return, whilst the EU’s emerging markets lagged, with many giving negative returns on the month.

Sterling mostly held its value against the Dollar ad Euro in April, though it did reclaim some ground against the main Asian currencies. The perception that a delay in Brexit makes a no-deal exit less likely, coupled with comments from Mark Carney about interest rate rises coming sooner than expected, helped to support the Pound. The Dollar similarly performed well against the Yen and Renminbi.

Government bonds were broadly weaker in April, leading to an increase in yield over the month. In the case of European sovereigns, this mean that ECB and German 10-year bonds tipped over into positive yield territory (just), whilst most other European yields also increased. Greece, which is still perceived to be recovering well from its troubles of recent years, saw the yield on its government bonds contract, as investors, seeking income, continued to buy. Spain also saw buyers and a contraction in bond yields.

*A Generic bond is a theoretical bond that always has the specified tenor, unlike a Benchmark bond, which is a physical bond, with a decreasing tenor.

Inflation – What’s the story?

If you have been watching the release of global inflation data over the past year, you may have been tempted to wonder what has been going on. Since the buoyant figures of last Spring, it seems as though, across most of the world, inflation has fallen in a way that rather serves to undermine the global growth story that stock markets have been trying to embrace.

In some cases, falling inflation numbers have gone hand-in-hand with slowing economic data. In the major European economies, for instance, manufacturing data and export orders have been retreating rapidly. However, retail sales have been resilient, which tends to suggest that the answer to the inflation question lies in prices, rather than demand. Whilst the two usually rise in unison, it seems that this relationship has broken down to a greater or lesser degree.

In contrast to the decades leading up to the financial crisis ten years ago, when the emphasis had always been on keeping a lid on inflation, central banks are now keen to get inflation back up to target if only to allow the ‘normalisation’ of monetary policy, but this is proving tricky, even with consumer spending remaining robust. Interestingly, with the current US inflation number sitting just below the Fed’s target of 2%, there is still no talk of a rate rise from the Fed, and President Trump is calling for a cut in the Fed’s target rate.

One answer may be that the sluggish growth being seen outside the US is acting to contain the prices of internationally traded goods. Another is the increasing dominance of internet shopping, leading to the demise of the High Street. Consumers may not necessarily spend a great deal more, but they can shop around, compare prices and find bargains much more easily.

There is a third reason why inflation has not kept pace with spending. A great deal of money is spent on technology – smartphones represent about 20% of technology spending, but the category also includes computers, TVs, games consoles etc. The technology contained in these products is not only improving, but the pace of improvement is accelerating. The price of gadgets has not kept pace with innovation, and inflation calculations include this factor as a fall in price.

To make this last point clearer, if you had bought an up-to-date, fairly high-spec computer, back in 1989, it would probably have cost you between £1,500 and £2,000. Thirty years on, an up-to-date, fairly high-spec computer will still cost you £1,500 to £2,000, but the technology contained inside the case has improved exponentially. Moreover, you could not now buy the 1989 computer even if you wanted to. The inflation figures take account of this zero-cost improvement in technology by using an ‘hedonic adjustment’. In other words, they treat it as a reduction in price. This adjustment can be substantial; TVs in the US calculation fell in price by 18% over the last year, representing the largest adjustment in the hundreds of goods that make up the technology part of the inflation basket.

It is, however, expectations of future inflation, more than actual reported inflation, that feeds into central banks’ monetary policy and the prices of index-linked bonds. In the UK, we have seen some evidence of stockpiling ahead of Brexit, both by companies hoarding materials, and to some extent by individuals, filling their larders with canned foods. Hence, in March, UK index-linked gilts rose by almost 7% as fears of a no-deal Brexit and a consequent spike in food prices drove investors to buy inflation-protected assets.

Within the UK, whilst there remains a meaningful probability of a hard or no deal Brexit, there are notable diversification and inflation protection benefits of holding index linked gilts. In the event of a hard Brexit, it is likely that there would be a devaluation of sterling against other major global currencies, with the resulting impact on import prices being inflationary. Despite this, ongoing political negotiations have driven up index-linked bonds’ prices in the near term though, suggesting that all in all, index-linked funds seem to be fully up with events following last month’s sharp rises.


This report was produced by Independent Strategic Research Ltd (“ISR”). The information contained in this report is for informational purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment. While ISR uses reasonable efforts to obtain information from sources which it believes to be reliable, ISR makes no representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are provided by ISR for professional clients only and are subject to change without notice. You must in any event conduct your own due diligence and investigations rather than relying on any of the information in the report. All figures shown are bid to bid, with income reinvested. As model returns are calculated using the oldest possible share class, based on a monthly rebalancing frequency and all income being reinvested, real portfolio performance may vary from model performance. Portfolio performance histories incorporate longest share class histories but are either removed or substituted to ensure the integrity of the performance profile is met. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. ISR and Independent Strategic Research are trading names of Independent Strategic Research Ltd, registered in England and Wales No. 09061794. Registered office: 34 Southwark Bridge Road, London, SE1 9EU, UK.

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