Market Review written by John Husselbee
October has often proved difficult for equities in the past but most markets were up over the month, with encouraging noises on the trade situation and another rate cut from the Federal Reserve.
Within this however, we have seen what more dramatically inclined commentators called the ‘momentum massacre’, as value stocks enjoyed a spike and growth names popular for the best part of a decade fell back. As our investors will know, our multi-asset portfolios have been tilted towards value since last year as we looked to take advantage of a valuation disparity relative to growth names.
It remains difficult to say whether we are at the start of a fresh bout of value outperformance – after several false dawns in recent years, we should all be cautious about uttering the ever-dangerous phrase ‘this time it’s different’. What we can say however is that the recent value spike shows just how quickly things can turn and the difficulties in trying to time market moves – and that is one of many reasons we continue to stress the case for patient investing.
On the trade front, with the caveat that we have been here before, the US said it is close to finalising the first phase of a deal with China. Negotiators are working to finish agreements for Presidents Trump and Xi Jinping to sign at the Asia-Pacific Economic Co-operation summit in mid-November although it remains to be seen whether that ultimately proves achievable. As things stand, the deal is expected to cover Chinese purchases of US agricultural goods, intellectual property protection, currency practices and increased access for US companies to China’s financial services market.
I was in China myself over the month, visiting Shanghai and Beijing, and would say that the long-trailed shift from export to consumer-led growth is in full flow. Among many examples of this, Beijing’s Forbidden City palace complex was largely empty when I first visited 12 years ago whereas it was packed throughout the day this time, largely with Chinese locals. China’s growth has clearly been impacted by the trade picture in recent months but if we do see some resolution on that front, this is a fascinating country to consider.
Meanwhile, the Fed cut its benchmark interest rate for a third time this year to help sustain US economic expansion and is now close to reversing 2018’s four hikes done in response to strengthening conditions. This latest cut came despite solid GDP data in the US, with Fed chair Jerome Powell apparently unwavering in his desire to keep ahead of the economic curve.
Powell said that only a ‘material reassessment’ of the Fed’s outlook would cause any shift in policy, although consensus suggests this may be the last cut for a while, with the pledge to ‘act as appropriate to sustain the expansion’ removed from the statement.
Of course, this second cut in the space of two months was not enough to appease Trump, who claimed ‘people’ are very disappointed in Powell and the Fed and the US should have lower rates than ‘all others’. Elsewhere in Trump-land, a bitterly divided House of Representatives voted to endorse a Democrat-led impeachment inquiry into the President and we expect the volley of abuse to pick up in intensity from both sides as we move into an election race.
Elsewhere on the macro front, October also saw Mario Draghi’s swansong at the European Central Bank (ECB), leaving his post as the first president not to raise rates during his tenure. The Bank held rates unchanged as it prepares to reignite its quantitative easing (QE) programme on 1 November.
Coming finally to the UK, as everyone will know, another apparently unassailable Brexit deadline of 31 October came and went and after days of back and forth, we are heading towards a General Election before Christmas.
The EU has extended the Article 50 deadline to the end of January and the outcome of the election looks set to rest, to a large extent, on a possible deal between Labour, the Liberal Democrats and possibly the SNP – a soft Brexit coalition of sorts. The fact we are heading into an election at all suggests the dreaded no-deal is at least off the table, with Labour only prepared to go to the country in that instance – and sterling strengthened on the back of this.
Boris Johnson’s government has also negotiated Withdrawal Agreement B and will likely campaign on that basis, while Jeremy Corbyn suggested he could sort Brexit within six months. That would require asking the EU for a fourth extension, despite the bloc saying it will not renegotiate the deal yet again, and giving the country a choice between leaving with a sensible deal or remaining in the EU.
At his campaign launch, Corbyn said Brexit is not that complicated; anyone who has watched the political convulsions of the last three and a half years might beg to differ.
In any case, we are likely to see a huge amount of manoeuvring and mud-slinging over the next few weeks and it will be increasingly important to block out the noise as far as possible and keep our focus on the long term.
If the above is of interest you can see John presenting at our next Investment Seminar on the 5th December. Book you free place here