View from the bridge October 2019 - Background

30 Oct 2019

In our last quarterly Review, we noted that trade concerns and the deteriorating momentum of the global economy had dominated the headlines on which investors focused.

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Three months later very little has changed, except that Central Banks in both the United States and Europe have loosened monetary policy and this approach has been adopted in a number of other countries. Each escalation in trade tensions prompted downward pressure on stock markets and contributed further to the state of uncertainty that has been shackling both corporate and consumer confi dence for much of the past two years.
The wellappreciated belief is that the lead time for economies to react to monetary policy stimulus is at least six months
Although investor anxiety was alleviated by Central Bank actions, the pattern of falling economic growth projections has not shown any such brightening. In part that is due to a wellappreciated belief that the lead time for economies to react to monetary policy stimulus is at least six months; indeed many economists think that this reaction can be even slower once interest rates are around zero.

Both the developed world and emerging countries have experienced this deterioration in growth forecasts and economists believe that the positive response to lower interest rates is unlikely to be felt in the remaining months of the current year. This leaves the prognosis for 2019 struggling to reach 3% global growth, compared with predictions of about 3.3% only three months ago. Such a slowdown is broadly spread between the advanced countries, where growth might be no more than 1.8%, and the emerging world where growth will prove less elusive but where the rate of just over 4% is still less rapid than was expected earlier in the year. Forecasts for 2020 have also been reined back, though the range of potential outcomes is wide and depends on when or if the tariff war between Mr Trump and other trading partners of the United States is resolved. Clearly it is in the interests all parties to achieve a resolution, but none will want to be seen to have conceded too much.
Total Returns to a Sterling Investor
Total returns to a sterling investor

Source: Refinitlv Datastream

The resumption of looser monetary policy together with weakening growth forecasts and tensions around trade fuelled investor nervousness and drove sovereign bond yields to new lows during the quarter.  As we cover in more detail on the next article on bond markets, European yields moved broadly into negative territory across a wide range of maturities and countries with (for example) investors at one point seemingly happy to pay the Swiss Government 1.2% annually for each of the next ten years for the privilege of lending to it.  
Though a little of such froth was blown off in the last days of the quarter, Government bonds in general outpaced equity markets and returns from global benchmarks for both asset classes were magnified by a further decline in sterling: the Brexit position showed no real signs of resolution and Boris Johnson, the newly selected UK Prime Minister, contrived to take on members of his own party as well as the House of Commons and the European Union.
As can be seen from the graph, investor sentiment was more volatile during the quarter than might be deduced from simply comparing the start and end values for the period.  Total returns from a rolling twelve month period look very appealing to a sterling investor, despite the poor experience of Q4 last year, with Government bonds producing more than 10%, Wall Street equities a similar amount and even the UK stock market generating a return ahead of domestic inflation.
In the latest quarter the only segment of a broad portfolio not to contribute to investors’ pockets was emerging markets, which remained under pressure from concerns about tariffs and free trade.  All other asset classes registered gains and those that were denominated in currencies other than the pound also benefitted from sterling weakness.

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