Please find below our Weekly Market Update for the week ending 25th October 2019.
Blue Sky Comment
At present, markets feel like they are range bound and in a holding pattern, mirroring the political situation. Brexit is one step forward and one back. US/China trade talks are progressing but very slowly and all this has at least taken some of the recent volatility out of stock markets. Company news on profits, in the important US earnings season, has been broadly positive, with more good outcomes, than disappointing ones. In particular, JPMorgan released decent results and in addition to this being stand-alone good news, JPM can be seen as a bit of a bell weather for the state of the US economy as a whole. The talk of a US recession is not currently in sight and the ongoing strength of the US consumer may well keep this at bay for some time. It is also true that the US has many of the World’s best companies in its index. Worldwide, the continuation of company share buy backs and investors desire for income, where in the UK 1 in 4 FTSE companies will pay a dividend in excess of 6% this year, mean that equity valuations are quite well underpinned. As always, something can come out of left field but in amongst all the negative news, there are positive indicators.
In the UK we have an upcoming Budget and the widely broadcast ‘end of austerity’ means this is likely to see some more fiscal stimulus. Government borrowing remains a challenge but one benefit of ongoing low interest rates, is that the cost of this borrowing is at historically low levels, meaning there is a bit of a ‘windfall’ available to spend. Last week also saw the Queen’s speech, which set out 22 new bills including a trade bill, a financial services bill, and an immigration bill which would see the UK adopt an Australia-based points system from 2021. The recognition of the financial services sector as a vital part of the UK economy, and the move to allow overseas funds to be sold in the UK post-Brexit, was received well. Railway and employment reforms and a new infrastructure strategy were further notable points. Taking the ‘politics’ out of our current situation, I think we would all like the Government to get on with this type of important business, for all of our long-term benefit.
In other important markets, Chinese economic growth fell to a 27 year low recently, with the ongoing trade dispute cited as the key reason. The Chinese vice-president indicated progress had been made on a ‘phase one’ agreement over trade. In reality, whilst trade is always in the headline over these talks, they are really about future innovation and intellectual property. This is why we feel that this is likely to be a lengthy process.
The situation in Europe is delicately balanced, with Germany cutting its growth forecasts for this year and next. It seems increasingly likely that fiscal stimulus, which is an increase in government spending or a cut in taxation, will be the economic weapon of choice. This is the same approach that Sajid Javid is proposing for the UK.
Away from economics, the BBC published a survey this week suggesting that as whole, people in this country were happier than a year ago – for those interested in Rugby let’s hope this is even higher, come Saturday lunchtime. Just like Brexit, I would not want to bank on it!