Market Commentary – August 2019

Bond yields continue to fall

July’s quarter-point rate cut from the Federal reserve was fully anticipated, but over August, US bond yields moved to reflect the expectation of a further half point to come. The assumption that the Fed was seeing signs of a US slowdown saw yields around the rest of the world fall further, with EU sovereign debt trading as low as a -0.7% yield at the month end.

Brexit still mired in uncertainty

The election of Boris Johnson as UK Prime Minister was seen as indicating that a hard Brexit is now much more likely. This was reflected in falls in the UK and EU confidence indicators, and sharp falls in the UK and EU equity markets, particularly Ireland. In fact, it quickly became clear that a final resolution to the impasse was no more likely than before, as MPs initiated action to block a no-deal Brexit, and there was talk of a general election in mid October.

Hong Kong/Latin America lead emerging markets lower

Emerging markets fell 4.9% in US Dollar terms, compared to a decline of 2.1% for developed markets. The decline was led by Hong Kong/Latin American equities and more cyclical sectors such as materials and financials. Trade war tension and protests in Hong Kong, now in their 13th week, were key sources of market volatility.

Sino-US trade war continues to escalate

Trade tension was ratcheted up when China, on 23 August indicated it would roll out additional tariffs on $75bn of US goods. President Trump quickly responded by tweet that US companies should look for an alternative to manufacturing in China. Meanwhile, from 30th August the US Federal Register confirmed tariff rises from 10 to 15 per cent on US$300 billion of goods.

Global equity markets were weak in August, with the UK among the worst performers. Emerging markets once again provided both the high and low-lights over the period, with Argentina falling 41.5%, whilst Egypt gained a relatively modest 9.2%, but outside of a few emerging markets that produced small gains, there were few opportunities for profit across the equity landscape during the month. Trade wars, Brexit and general fears for global growth following the Fed’s July rate cut were uppermost in investors’ minds.

There was little to celebrate in the European markets, as the prospect of a no-deal Brexit began to weigh heavily on the UK, and adverse sentiment provided a further drag on the EU markets. Whilst Turkey, always a volatile market, was the worst faller, losing 10.6%, Ireland, which stand to be hardest hit by a hard Brexit, lost almost 6%. Almost all regional markets were down, with Denmark’s 1.7% gain leading a very short list of risers.

After the fall in sterling in July, the currency stabilised, but made no attempt to rally, as, with Parliament not yet in session, there was little to indicate how events would actually play out in the weeks ahead of the October deadline. The Dollar saw some further gains, particularly against a weakening Chinese Yuan, as the trade dispute between the two countries showed no sign of achieving the swift resolution that markets had hoped for. The Yen continued to act as a safe haven, gaining ground against other major currencies once again.

After July’s rate cut from the Federal Reserve, expectations quickly turned to further cuts, and the rise in bond prices and collapse in yields continued apace during August, seeing another 0.5% off the 10-year US Treasury yield. There were also substantial reductions across the European markets, sending the yields on major market sovereign debt down to as low as -0.7%.

*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.

Global confidence is waning

Sometimes it is good to sit back and take a look at the broader picture. For all noise in the markets, global equities and the US equity market have made little progress in a year, despite being volatile throughout the period. Quite frankly, the more this goes on, the more that the western markets look like they are going through their “Japanification”, a phrase coined to denote high debt and very low, or even negative growth and inflation rates. In a year, global equities are largely unchanged, and the US 10-year government bond yield is down 136bps at 1.50%. Most eurozone bond markets have slipped into negative territory. The Japanese JGB 10-year yield didn’t go negative until 2016, 25 years after the start of the economy’s problems.

Western governments are even starting to sound like the Japanese. The thought is slowly creeping into their collective heads that a round of infrastructure spending is in order. After all, many of them can borrow money at negative interest rates. However, infrastructure spending is no panacea. A study by Ronald Utt (Utt. R., “The Economic Stimulus Package and the Limits of Infrastructure Job Creation”, 2009, ) showed that Between 1992 and 2000, Japan implemented ten separate spending stimulus packages in which public infrastructure investment was a significant component. Over that same decade, the equity market fell by a third. At the end of last year, Japan was still trying to use infrastructure spending to boost the economy; the government announced 3 trillion Yen of spending over three years. However, year to date, Japan is once again the worst performing major equity market.

Policymakers are going to have to do much more to arrest the collective global malaise. But it appears that the only short-term fixes are in the hands of the American President. Unfortunately, his current policy playbook is destructive of global growth. He continues to bet that his “America First” mantra played out through his trade war stance will win him the next Presidential election. Opinion polls are very mixed. The most recent opinion poll on the handling of the economy by President Trump has 47% approve-51% disapproval, although other polls have shown much higher disapproval. A head-to-head of Trump against Biden would have Biden winning by 16 percentage points however the approval-disapproval rating of the Democrat-led Congress has a net 49 percentage point disapproval rating. On the face of it, and notwithstanding the intricacies of the US electoral college system, there is little comfort that polls will have President Trump shifting his policies anytime soon.

On the other side of the trade dispute, Chinese industrial confidence data continues to slip, although not dramatically. Indeed, while the manufacturing sector remains under pressure, the non-manufacturing sector showed a very modest uptick in confidence. The manufacturing sector confidence indicator from the National Bureau of Statistics fell to 49.5 in August down from 49.7 in July slightly below expectations of 49.6. Any reading below 50 implies a contraction of activity. The survey has been below 50 for six out of the last eight months. The service sector indicator, by contrast, remains above the 50 level of 53.0.

In both the UK and Europe, both consumer and business confidence have been erratic, but generally trending downwards for more than a year, with the latest figure, reflecting a further tick down, which it is difficult not to ascribe to Mr Johnson’s election and the heightened concerns over a hard Brexit. It is hard to see confidence being restored whilst so many unknowns continue to plague European politics, and the fall of nearly 6% in the Irish stock market last month is the best indicator of how sentiment is becoming increasingly negative.

Against a backdrop of global economic and political uncertainty, we continue to focus on downside protection in our clients’ portfolios, and seek diverse and uncorrelated sources of return, whilst hedging out currency risk wherever possible. Our research leads us to invest in funds and managers that have a proven track record of identifying opportunities in difficult markets, and protecting invested assets against short-term turbulence in asset classes.


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