By Max Newman, Research Manager
Stock markets gained in each of the first three months of the year, reversing much of the weakness seen in the final quarter of 2018. Federal Reserve Chairman, Jerome Powell, effectively delivered what markets wanted to hear in that further rate rises may now be put on hold. This is a truly remarkable U-turn having raised rates four times in 2018 alone. Markets initially reacted warmly to this news but investors are increasingly concerned that the Fed is trying to get ahead of a slowdown in US growth.
The US economy has held up relatively well in light of trade tensions and the longest government shutdown in history, although jobs figures were weak in February. This more likely reflects the double counting of government workers taking second jobs during the shutdown and the data should recover in March. The apparent slowdown in global growth is largely related to deceleration in the rest of the world. US-China tariffs have certainly had an impact but arguably more through the knock-on effect on business confidence and investment. The softening in trade also looks sector specific, with weakness in auto sales and consumer electronics.
As well as the trade tensions with the US, there is evidence of a more general domestic slowdown in China. GDP growth for the fourth quarter of 2018 was announced at 6.4 percent year on year, although many will take these official statistics with a pinch of salt. More telling is the response made by the Chinese authorities to stimulate the economy, cutting the amount of cash that banks have to hold as reserves in a move to free up new lending. This reverses previous policy tightening by the People’s Bank of China that could be to blame for the recent slowdown.
Hopes that the slowdown in Europe had reached a trough were dashed with renewed weakness in France and Germany. Survey data for the euro-area is signalling growth of 0.2 percent for this quarter, matching the pace of the final three months of 2018. German manufacturing has also weakened given its exposure to the automotive sector, where new emissions regulations have temporarily disrupted vehicle production. France should also recover from the disruption related to the yellow vest protests. Clearly, there are one-off forces at work here and the same can be said for Japan, which looks set to rebound from a series of natural disasters that hampered last year’s GDP growth figures.
It seems nowadays that no market commentary is complete without the mention of political uncertainty. Markets have priced out the likelihood of a ‘No Deal’ Brexit because of the strong majority in Parliament against leaving without a deal. Yet despite gaining some concessions from the EU on the backstop arrangement, Theresa May’s deal went on to be voted down in the House of Commons a further two times. March 29th came and went, with the UK remaining a member of the EU having been granted an extension until April 12th.
While the difficulties in global manufacturing show little sign of abating, we believe fundamentals remain solid for the US domestic economy. This is also the case for the UK despite continued uncertainty surrounding Brexit, with record levels of employment and strong wage growth ahead of inflation. The outcome is that households are keeping the economy growing despite caution among businesses ahead of the Brexit deadline. With a potentially lower but sustained growth outlook for the global economy, we continue to favour companies with their own structural growth drivers that are positioned to themes such as ageing populations, changing consumer habits and development in Emerging Markets.