Chief Investment Strategist
Market Overview, Alan McIntosh
Most equity markets squeaked a bit higher last week, in the absence of any material news on Sino-US trade talks and Brexit. In both cases, there is a clock ticking and a high degree of brinkmanship being employed by respective parties. There is also damage to real economic activity in evidence in each situation, but markets remain optimistic that worse-case scenarios will be avoided. More tangibly, the US company results season continues to deliver the (by now) familiar beat of previously lowered revenue and earnings expectations. Outlook statements rightly reflect a higher degree of global uncertainty and a slowing of growth in some geographical areas, but, anecdotally, the world economy does not look as if it is about to tumble into recession. Meanwhile equity valuations are supportive relative to history.
One of the big questions for this year is where market “leadership” will come from in terms of sectors making the running. Years of low bond yields have favoured growth stocks over more value based strategies, but rising yields in the US during 2018 threw this approach into doubt. More recent falls in bond yields amid a more subdued interest rate outlook, which in turn is informed by lower growth and inflation expectations, have seen growth stocks start performing again. In a lower bond yield and a slower global GDP environment you would expect to see dependable growers do better than their more cyclical brethren, but the valuation gap between the two groupings is already high. All we can say for now is that higher volatility will deliver more opportunities across the whole market as the year unfolds.
Economic Overview, Richard Carter
Theresa May’s strategy of running down the Brexit clock might ultimately be good politics, but today’s UK data suggests it is not good economics and is arguably becoming quite irresponsible. The economy did manage to grow in Q4 but only by 0.2% and GDP actually contracted by -0.4% in December. Some of the accompanying numbers makes for depressing reading: manufacturing production was down 0.7% on the month (the sixth decline in a row); construction output fell by almost 3% in December and business investment was down 3.7% on the year. What’s more, there is no sign of an end in sight with the next meaningful vote unlikely to take place until March. However, this week will see Labour try and force Theresa May to hold the vote by the end of February, while the latest incarnation of the Brexit Secretary will travel to Brussels for talks over the backstop.
The overall theme remains sluggish growth in most parts of the world, with the exception of the US. Trade talks between the US and China will resume in Beijing this week and will be closely followed by investors. There is also the risk of another US government shutdown unless Congress can strike a deal on immigration and border security. On the data front, US inflation and retail sales numbers are out, and we will see if Germany managed to avoid a recession in Q4 when GDP numbers are released.
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.
Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.