Market Commentary - Aug 2019
2nd September 2019
It has been a strong year to the end of July for equity markets, with most enjoying mid-teen growth. For a UK-based investor, July’s positive returns were led by sterling’s weakness, which fell 2% against the euro and nearly double that against the dollar. Sterling’s depreciation was perhaps not surprising given that Boris Johnson has committed to leaving the EU on the 31st October – with or without a deal.
Accordingly, growth forecasts in the UK have weakened, and as Brexit continues to weigh on sentiment and uncertainty remains, a lacklustre outlook for the domestic economy is something we should perhaps expect for the short to medium term. Sterling will act as a barometer for the UK’s perceived negotiating position and given most of the earnings for UK companies are derived from foreign sources, further currency weakness makes UK assets more attractive from a global investor’s perspective.
In the US, markets have been rallying as investors have been buying on the hope of a US interest rate cut and the initiation of a rate-easing cycle. The rate cut was duly delivered mid-month, but investors were not positioned for the accompanying commentary which stated this may be a midcycle adjustment in policy, rather than a full-blown easing cycle.
As the current earnings season draws to a close, the majority of reporting companies have declared earnings and profits ahead of expectations. When looking closer, the companies – and funds that invest in them that have prospered recently are the “quality compounders” that we seek as a result of our investment style – resilient businesses that just keep churning out dividends and patiently growing. The strength of these earnings figures can be attributed to US consumer strength. One must remember that this positivity comes on the back of a poor final quarter in 2018. Many companies that had been promising 10% growth levels a year ago started 2019 with modest, even zero-growth, ambitions. In short, recent earnings results have beaten low expectations.
We are aware that the global macro economy has been decelerating – trade wars have not helped – and China, particularly, has slowed, but there is evidence we are nearing the bottom. Returns this year have been very strong in equity markets, and we have to ask where the next good news is going to come from. Perhaps from a resolution of the US China trade war, A Brexit resolution, or a rebound in economic momentum.
For now, many investors seem to be holding money back from equity markets, worrying about a correction, or worse. We are not gloomy, but we are cautious.