By Kevin Wijnant – Investment Manager.
The summer months are generally a “quiet” time of the year, where we see a reduction in liquidity and market moves are less distinct; however, the summer of 2019 has proven to be an interesting time for investment professionals nonetheless.
Whilst many were enduring the numerous heatwaves besetting the UK and Continental Europe over the past months, things were also heating up on the political playing field. Tensions over trade policy between the US and China have been escalating with no end in in sight. This ‘trade war’ has strained the relationship between the two countries and although numerous occasions emerged during which both parties were able to reduce hostilities, tariffs have been slapped on anything ranging from consumer electronics to airplanes, cars, pork, and soybeans, on a tit-for-tat basis. Global trade grew markedly since 2015, but with the opening salvo of a mutually-impairing trade war between the world’s largest economic powers having been fired, free trade hit a snag and raised concerns which we undeniably need to monitor in the remainder of 2019 and at the start of the next decade.
Closer to home, politicians on both sides of the English Channel have been unable to come to any meaningful agreement regarding the terms of the divorce arrangement with the European Union. In an unprecedented move, Prime Minister Boris Johnson announced in August that Parliament will be suspended for four weeks from mid-September. Despite the Supreme Court’s ruling that Johnson’s suspension of Parliament was unlawful a month later, Boris’ intended “B-Day” on 31st October is fast approaching and working out a deal before this date is imperative to avoid any substantial economic damage.
Whilst the first half of 2019 brought a major recovery in asset markets after the challenges of the fourth quarter of 2018, the second half of the year offered investors more modest returns as traders assessed the growth outlook. Key economic indicators suggest a road of sluggish performance may lie ahead of us; however, markets have defied bearish signals as UK indices ended up at approximately the same level as where they started at the beginning of the third quarter.
August was perceived as a volatile month and investors fretted a global slowdown in economic activity, marking the end of a 10 year boom period. Whilst these jitters haven’t disappeared completely, performance in September proved to show a moderate recovery of asset prices.
Six days before the end of the quarter, markets were stirred again as US Speaker of the House of Representatives, Nancy Pelosi, announced six committees would start with formal impeachment inquiries after reports about controversial interactions between US President Donald Trump and the Ukrainian president, Volodymyr Zelensky. Major US indices whipsawed the days following the news of the inquiry by worries of the President’s political future.
The Bank of England kept its calm during the volatile third quarter and struck a dovish tone, keeping rates on hold in September, as it wishes to maintain some firepower ahead of the final phase of the Brexit negotiations. Meanwhile, in Frankfurt, in one of his final acts in his European Central Bank’s presidency, before Christine Lagarde takes charge in November, Mario Draghi announced a fresh stimulus package in an attempt to prevent the fragile Eurozone economy from grinding to a halt.
On the other side of the Atlantic, the Federal Reserve cut interest rates by a quarter percentage point for the second time since July. Policymakers globally have been sharply divided over whether to hold or continue to gradually reduce rates in light of the events described above.
We believe that “realism” is appropriate at a time when asset valuations are not cheap and the economic potential of the developed world, in particular, is lower than it has been for the last 50 years. Nonetheless, we also see the current climate as an excellent way to take benefit of suppressed asset prices and we will continue to monitor for any market developments enabling us to discover favourable investment opportunities.