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Quarterly Investment Update Q3 2018

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Summary

The world economy keeps growing despite Brexit bombast, trade tension and emerging market flare-ups. We think it remains sound despite recent market volatility.

3 min read

Strong US economic growth continues to underpin a healthy global landscape for investors. Markets may have wobbled in October, but we still see a positive environment for investing. 

Brexit uncertainty, trade war rhetoric and emerging market strain have done nothing to derail the world economy and the current outlook doesn’t appear to be under imminent threat. The US Federal Reserve (Fed) raised its growth forecast for America last month, which leads us to believe markets are likely to maintain their momentum for the time being.

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Equity markets fell in October on fears that rising borrowing costs in the US would dent company profits. Markets are likely to remain volatile in the coming weeks but we think the underlying global economic backdrop remains sound and supportive for equities.

While market corrections like this can be unnerving, they demonstrate the importance of having an active investment manager like Coutts who can react appropriately for clients’ interests.   

Commenting on the wider economic backdrop, Coutts Multi-Asset Investment Manager Monique Wong says, “We are seeing a tale of two economies. On one hand, the US continues to power ahead, benefitting from low unemployment, positive consumer sentiment and President Trump’s tax reforms. On the other hand, growth outside America continues but is decelerating after hitting its peak last year.

“The encouraging news for investors is that, as the world’s biggest economy, the US influences stock performance around the world. So as long as it’s in good shape, we continue to see a positive environment for investing.”

 

We have the technology

The technology sector continues to be the powerhouse of US investment returns. Over this quarter, both Apple and Amazon became $1 trillion companies, a first in the history of US stock markets and a symbolic moment for the astonishing rise of tech over the last 25 years. Tech firms now make up about a quarter of US stock index the S&P 500, highlighting their importance to investors.

At Coutts, technology is one of our preferred investment themes and its strong returns have been good for our portfolios – although past performance should not be taken as a guide to future performance. We invest in the sector through a specialist third-party fund as well as our own holdings and general equity exposure.

The strong tech industry is just one factor powering US economic growth. Most of the economic indicators we consider – unemployment, industrial surveys such as Purchasing Managers’ Indices and GDP growth – are strongly positive. This backdrop will have been behind the Fed’s decision to raise its growth forecast for the US economy this year to 3.1% from 2.8%. 

“The encouraging news for investors is that, as the world’s biggest economy, the US influences stock performance around the world. So as long as it’s in good shape we continue to see a positive environment for investing.”
Monique Wong, Coutts Multi-Asset Investment Manager

Trade off or trade on?

Trade tensions persisted in the three months to September, with talks between the US and China stalling and President Trump imposing a further $200 billion worth of tariffs on Chinese goods. China quickly retaliated with its own levies worth $60 billion.

While the potential escalation of this issue is a legitimate concern, market analysts currently tend to think that, in its current form, it will have minimal impact. It’s worth remembering that US exports to China accounted for less than 10% of total US exports last year, according to the Office of the US Trade Representative.

There was positive news on the trade front in Q3 too. The US agreed a new trade deal with Mexico, and later Canada, to replace the North American Free Trade Agreement (NAFTA).

 

Chequers mate

Brexit uncertainty rumbles on, with the European Union (EU) rejecting Prime Minister Theresa May’s so-called ‘Chequers plan’ and political rhetoric ramping up during party conference season. Despite this, the UK economy has performed better than many commentators predicted at the time of the referendum. Unemployment is at its lowest for four decades and the rate of GDP growth remains positive.

The Bank of England (BoE) raised interest rates to 0.75% in August – their highest level in a decade – but that didn’t stop inflation unexpectedly rising to 2.7% from 2.5%. The rise represents a harsh reminder of the corrosive effects of inflation on cash. Meanwhile, BoE governor Mark Carney agreed in September to stay on until 2020 to help ensure a smooth transition when the UK leaves the EU.

As for markets, UK shares have also rebounded since the EU referendum but stayed more or less flat over the most recent quarter.

On Brexit, we believe some variation of a Canada agreement is likely before the final deadline. But the situation is unpredictable and a range of outcomes remains possible. While Brexit is certainly a risk to investors, we maintain our view that long-term macro-economic and company data will ultimately drive returns more than any political shocks.

 

Emerging concerns

Emerging markets have had a difficult year with ongoing US dollar strength causing a headwind for companies and governments that have borrowed in dollars. Although recent turbulence in Turkey and Argentina appear to be isolated events, investors remain cautious about the risk of contagion to other emerging markets.

We reduced holdings in emerging market equities earlier this year but continue to hold a position in emerging market debt because of the high yields on offer, and because we think the emerging market currency sell-off was overdone.

 

Market returns

The MSCI All Countries World Index returned 4.7% over the third quarter of 2018, translating to a gain of 5.6% for UK sterling investors. The Barclays Global Gilts Index returned -1.8% over the three-month period, with yields falling by 20 basis points.

Find out more about our thinking on Brexit and the trade war.

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

KEY TAKEAWAYS

The world economy continues to expand, fuelled by strong US growth. Global growth has held up despite the big three current concerns for investors – the trade war, Brexit negotiations and emerging market troubles. With no current signs of the outlook changing, we still see a positive environment for investing.

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