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Weekly Comment: 15.07.2019

Market Update

US equity markets reached new all-time highs last week – so all is fine for equity investors? Yes, if you look at returns so far this year, but no, if you focus on the risks to continued profit growth in the quarters to come. Investors have a large degree of faith in monetary authorities to maintain the current economic expansion through 2020 and beyond. The decision of how much stimulus the economy needs, however, is a difficult one.

Shorter term focus will be on second quarter corporate profitability. Earnings season kicks off properly with all of the major US banks reporting this week. Current estimates are for the average US company profits to contract slightly year on year, but companies have become very professional at managing investor expectations. We expect most companies to materially beat forecasts giving 2-3% Q2 market earnings growth, largely due to previous buybacks not absolute profit growth. More importantly will be the outlook statements given by the management of these companies – investors expect earnings acceleration from Q4 2019, evidence to support this belief would be gratefully received.

Economic Update

Financial markets sometimes have difficulty in focusing on what really matters for long term investors. However, focus over the last week has been on the USA and China, two economies that are crucial to global prosperity.

Headlines will focus on second quarter Chinese GDP falling to 6.2%; its lowest level for 27 years. This is an attention catching line but the moderation of Chinese growth as its economy grows and rotates towards domestic consumption is nothing new. Monthly data for industrial production and retail sales rebounded, giving evidence that the moderate fiscal easing earlier in the year had the desired effect to support growth.

In the US, equity markets reached all-time highs to the delight of the President, despite uncertainties created by contradictory economic data and trade disruption. Fed Chairman, Jay Powell, cited a number of concerns in his biannual testimony to congress last week. Uncertainty on trade, persistently below target inflation and soft global growth all give the Fed reasons / cover for an interest rate cut at its July 30-31 meeting. President Trump may criticise the ‘Fed’s antiquated policy on rates’ but the decision to cut by 25 or 50bps (or possibly not at all) will be based on a thoughtful analysis of the risk faced by the US and global economies.

Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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