Capital Markets Update: May 2019

For professional advisers only. Not to be relied upon by retail investors.

Capital Markets Update

 

  • Brexit uncertainty remains
  • Trade war is back
  • Softer corporate data
  • US consumer remains robust
  • Multi manager team views

 

In a nutshell

 
The stockmarket rally reversed in May, as renewed trade tensions, and a slew of weaker than expected corporate data poured cold water on investor optimism. In this ‘risk off’ environment, safe haven assets such as government bonds performed best. Investors did salvage some cheer from the strong US consumer data.
 

Brexit uncertainty remains

 
The Prime Minister announced she would step down in June, as it became clearer that she still lacked a parliamentary majority for her deal. The British electorate went to the polls to vote in the European Elections and the results showed public opinion as divided as ever on whether to ‘Leave’ or ‘Remain’. The increased uncertainty arising from these events was one of the reasons behind Sterling’s fall against the US dollar in May. Investors are concerned about the possibility of a hard-line Brexiteer winning the Tory leadership contest leading to a ‘no deal’ outcome, and a general election leading to a market unfriendly Labour government.

Recent political events have tempered our stance on UK assets and we have sought to moderate risk accordingly.
 

Trade war is back

 
The deadline for Washington and Beijing to reach a trade agreement passed in early May, resulting in the US raising tariffs from 10% to 25% on approximately $200bn worth of Chinese imports. In addition, Trump announced that a process had begun to use the same 25% tariff on a further $325bn of Chinese goods. China retaliated by increasing the tariff range on $60bn of imports from the US. Investors are concerned that the latest salvos fired will hurt both the US and Chinese economy, causing inflation and lower spending on capital expenditure. This hurt stockmarkets, with those companies more sensitive to economic events falling most.

Increased uncertainty potentially leading to how and when this gets resolved, makes it difficult to have too much conviction in market direction in the short- term.
 

Softer corporate data

 
Data from the US, Europe, China and UK came in weaker than expected. In the US, the manufacturing purchasing managers (PMI) index, which tracks the direction of economic trends in the manufacturing and service sectors fell, whilst the new orders component declined into contraction territory for the first time since 2009. In Europe PMI also fell. In China, the retail sales and industrial production data disappointed, and investors now hope that recent economic data coupled with renewed trade fears will encourage governments to take measures to stimulate their economies.
 

US Consumer remains robust

 
Although corporate data was soft, consumer data globally was largely positive. The latest US jobs report showed that unemployment fell. In addition, US consumer confidence data showed an improvement. For investors, the fact that the US consumer story remains healthy is very significant, given how much consumer spending dominates GDP growth.

We are encouraged that the engine of the US economy, the consumer, is still running smoothly, however the more sanguine corporate data highlights that an element of caution is still warranted given the current environment of uncertainty.
 

Multi manager team views

 
As market activity highlighted in May, jitters remain over the global economic outlook. We believe that an element of caution is still warranted at this juncture.

The current market volatility we are witnessing should create a favourable environment for active fund management, where adopting a diversified investment approach could be rewarded over time. We continue to look to manage our portfolios through the inevitable market ups and downs to deliver a smoother investment journey for our clients.

 

Important information:
For professional advisers only. Not to be relied upon by retail investors. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: May 2019. CAM008372.