Investment Views

21.10.2019
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October 2019

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

Investment Views for Oct 2019

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

In ‘relative’ terms we remain positive on equities, but this does not imply that we believe the stage is set for a sustained uptick in equity market valuations. Economic data is deteriorating, manufacturing is struggling, the services sector is at risk of contagion, employment growth is slowing, business confidence is falling, and consumer confidence may be on the wane. The risk of recession is significantly greater than twelve months ago, and, without some fiscal boost to support the loose monetary policy of central banks, global growth is likely to be tepid at best. We do not see the US and China striking a trade deal any time soon, and so unless corporate earnings surprise on the upside we expect the markets to trade broadly flat, with volatility likely to be amplified by geopolitical events.

Fixed Interest

We already live in a world of either very low or negative sovereign bond yields, and yields could get lower still if the increasing risk of recession encourages central banks to trim interest rates further. Few bond yields exceed inflation and the majority of the return is likely to take the form of capital gain as long as there are buyers in the market, be they individuals, institutions or central banks. Bonds still have a place within a balanced portfolio as a risk-off asset and to counterbalance credit risk. Within credit (corporate bonds) our favoured sector is investment grade, where yields are higher than sovereign bonds and where default risk is markedly lower than in the higher yielding corporate bond sectors.

Property

We remain negative on commercial property, particularly in the UK, largely over the uncertainty caused by the Brexit debacle. Property has generally been regarded as a defensive income-generating sector that benefits when yield-seeking investors are trying to escape declining rates. Yet listed property securities have enjoyed a very good 2019, and the sectors that have outperformed are those where total returns are generally driven by earnings growth and price appreciation rather than yield. We retain some exposure to global property securities, but this is limited given the weakness in the economic growth outlook and geopolitical risks. We remain cautious, other than on a long-term basis.

Alternatives

Industrial commodities – most prices look set to soften as global growth remains weak. The slowdown in Chinese property development is expected to weaken demand in the construction sector putting downward pressure on steel and base metal prices.

Oil – with supplies from Saudi Arabia now fully restored and the weak global economic outlook, prices are expected to trade close to current levels.

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

With UK interest rates seemingly on hold and the huge uncertainty created by Brexit, it is unlikely that yield-hungry depositors will be satisfied in the short-term. Consequently, cash currently serves only as a diversifier, helping to reduce portfolio risk by dampening volatility.

Equity Region Current View Outlook
UK

Recent (significant) strengthening of the pound in response to optimism that at last a Brexit deal may become a reality has reversed some of the trends seen for much of 2019. The share prices of UK small and medium-sized companies have shown some recovery, especially those that are domestic-economy focused. In contrast, UK-listed global businesses have seen their share prices suffer. Even if the UK parliament approves a Brexit deal economic, business and political uncertainties will remain and so we are careful to maintain a diverse exposure to the UK equity market.

US

The US Leading Economic Index is indicating an elevated risk of recession, and this is supported by severe problems in the manufacturing sector and now some signs of weakness in the services sector. A recession is not a given, and for now employment numbers remain relatively buoyant helping to support consumer confidence; but if corporate earnings figures disappoint and employers start to shed staff, confidence will soon erode thereby impacting consumer spending which accounts for two-thirds of US economic activity. With the trade war continuing and more tariffs in the pipeline, even further interest rate cuts may be insufficient to halt the pace of the slowdown. To support his re-election in 2020 President Trump may seek to stoke the economy by applying some fiscal stimulus, but will it be too late - there is plenty of uncertainty to contend with.

Europe

Economic growth in the region continues to slow and is set to remain weak. Survey data, especially for the manufacturing sector, paints a poor outlook and business sentiment surveys point to falling capital expenditure intentions. Although consumer confidence has been high it is showing signs of slowing, as has employment growth. Although Brexit and trade wars are influencing factors there are some deep underlying issues presenting huge challenges for the authorities. Core inflation remains stubbornly low and so the ECB is likely to resort to more stimulus in due course. With Christine Lagarde shortly to take the helm at the ECB she will be hopeful of building a consensus to apply some fiscal policy stimulus, but political pressures may delay the timing and extent of any boost from this direction.

Japan

Despite reasonably buoyant equity markets of late, the economy continues to contract as manufacturing deteriorates, not least because of the wider global slowdown in growth hitting Japan’s exports, and consumer spending falls reflecting the impact of the recent sales tax hike. There are signs that the uncertain economic outlook is starting to hit firm’s hiring intentions. Whilst the Bank of Japan is expected to remain supportive, concerns over the health of some banks is likely to limit the form(s) of any further stimulus. We continue to 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

China’s economy has remained relatively resilient in recent months despite the undoubted impact of the trade spat with the US, but growth is slowing. This is to be expected given that the property construction boom seems to be coming to an end and the headwinds of higher food inflation and slowing global demand. Although current growth levels may be a more realistic indicator for the future the market is growing wary of slowing growth and policymakers’ apparent reluctance to use stronger stimulus measures. Elsewhere, economic growth has bottomed out but is likely to remain relatively weak, largely reflecting a slump in exports. Economic recovery in Latin America is expected to be weak and Argentina is at risk of default. Monetary policy is expected to remain loose and further stimulus is likely.

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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