Investment Views

24.09.2019
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September 2019

Here we summarise our Investment Committee's immediate outlook for the primary asset classes and major equity markets.

Investment Views for Sep 2019

  • Positive
  • Neutral
  • Negative
Asset Class Current View Outlook
Equities

Increasingly geo-politics is becoming a major influence on the global economy. Tariffs and uncertainty are features of the US-China trade dispute and the Brexit debacle, neither of which are conducive to global growth. Global manufacturing remains in contraction mode with even the previously resilient US manufacturing sector showing signs of weakness. So far, the services sector shows little signs of contagion, and with consumer spending still relatively buoyant (aided by healthy employment levels and wage growth) advanced economy markets are trading more in mid-market correction territory than the expectation of an imminent recession. To a large extent this is supported by the accommodative mood of central banks, albeit almost exhausted, and so the outlook may not be as bad as was being suggested last month. Consequently, for now, equities remain our favoured asset class, although much upward progress from here is likely to be limited; we also expect to see periodic bouts of heightened volatility as markets respond to trade and political tensions.

Fixed Interest

It is estimated that about $17tn of global sovereign bonds now trade with a negative yield and so owning them only makes sense if further capital gains are expected, or if held within a balanced portfolio as a risk-off asset to counterbalance credit risk. For now, core yields seem to have stabilised and could remain range bound in the short term. Credit (corporate bonds) have recently outperformed sovereign bonds suggesting investors have shifted towards a reflation trade; but with credit spreads having narrowed and perhaps limited chance of further interest rate cuts before the end of the year, the short-term outlook for bonds is perhaps less attractive.

Property

With the real estate cycle at a mature stage the prospect for capital growth is limited. Income yields remain relatively attractive although the sector is not without risk given the weakness in economic growth and geopolitical risks. A no-deal Brexit is likely to cause UK capital values to decline, albeit to a limited extent. Elsewhere, there is increasing concern about a possible ‘asset bubble’ as surplus liquidity chases limited supply and so a cautious approach is required.

Alternatives

Industrial commodities – the softer global growth outlook, especially the weakening of the Chinese economy, is hampering demand thereby effectively capping prices.

Oil – an attack on Saudi Arabia’s oil facilities knocked out 5% of global crude supply, sending oil prices surging nearly 20%. However, the expectation that Saudi oil output will quickly be restored together with a weak global economic outlook is expected to result in a gentle softening of prices.

Gold – bouts of investor uncertainty are likely to increase demand for gold’s safe-haven qualities. A softer dollar, given the expectation of a decrease in US interest rates and low bond yields, should also be supportive.

Absolute return – offers the potential to dampen volatility and provide some downside protection, but returns are often moderate at best.

Cash

The recent decision by the Bank of England to keep UK interest rates on hold did nothing to boost the short-term prospects for yield-hungry depositors. Sluggish growth coupled with ongoing uncertainty, much linked to Brexit, is likely to stay the hand of the Bank of England in hiking rates. Consequently, cash currently serves only as a diversifier, helping to reduce portfolio risk by dampening volatility.

Equity Region Current View Outlook
UK

Uncertainty caused by the Brexit debacle continues to emasculate the UK economy as the political and legal shenanigans dominate the headlines. Although recent economic data shows signs of improvement, this could simply reflect accelerated activity ahead of Boris Johnson’s 31 October deadline to leave the EU. Employment levels remain high and wage growth is accelerating helping consumer spending to remain buoyant. Sterling’s relative weakness continues to support the equity market, especially amongst large cap stocks generating high levels of overseas earnings. We maintain our neutral outlook but expect that any Brexit deal is likely to stimulate a ‘relief rally’.

US

Whilst US manufacturing continues to weaken and the economy slows, US consumer spending (which accounts for two-thirds of US economic activity) is growing at its fastest rate since 2014. Solid wages, low unemployment, low interest rates and low inflation have benefited the consumer. However, if companies pass the tariff impacts on to consumers (so far tariffs have been largely absorbed by companies) consumer demand may begin to wane. With the market having already anticipated the recent reduction in US interest rates, uncertainty over further cuts, and a likely softening in corporate earnings, it may require some fiscal stimulus to extend the economic cycle for a little longer.

Europe

Economic growth remains under considerable pressure, with manufacturing in recession, a challenged banking sector, and elevated geopolitical risks in the form of Brexit and Italy. These factors, together with inflation remaining stubbornly low, persuaded the ECB to loosen monetary policy and deliver a huge stimulus package with interest rates falling further into negative territory, the re-start of Quantitative Easing and advantageous loan facilities to encourage banks to lend. Some form of fiscal policy stimulus is also likely, but political pressures may delay the timing and extent of any boost from this direction.

Japan

Japanese corporate earnings are sensitive to the pace of the global economy and, despite the ongoing commitment from the Bank of Japan to maintain an ultra-loose monetary policy, there is little room left for additional easing in the event of a downturn. The lack of economic momentum has resulted in expectations for the economy and corporate earnings to be marked down, although public investment and domestic consumption should contribute to economic activity. We favour domestic-oriented growth companies seeking to tap into Japan’s long-term change to its economic and social structure, and whilst Japanese stocks have rarely been cheaper, the time horizon is such that we maintain our neutral stance.

Asia Pacific and Emerging Markets

As yet, the full impact of the US-China trade dispute on capex plans, supply chains and trade activity have not been seen, and the impact of front-loading before the tariffs took effect is expected to be felt later this year. Economic growth is expected to remain weak across emerging Asia and export-driven economies, which are highly vulnerable to rising trade tensions. However, relatively muted inflation and a more dovish Fed gives central banks the flexibility to ease policy with expansionary budgets and infrastructure projects, although economic growth forecasts continue to decline.

Risk warning: Investors should be aware that past performance of investments is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them may fall as well as rise. The content of this bulletin is for general information and reflects the general market view of Parallel Investment Management Ltd. - it should not be interpreted as recommendations or advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content.

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