Market Review – 3rd Quarter 2019

Market Review – 3rd Quarter 2019 981 980 Realm
In the third quarter, through end September, equity markets remained volatile including a sharp sell-off in early August related to worries over trade disputes. Those losses have been recovered in most regions, although notably not in the UK where equity indices remain well below their July highs. There was a clear rotation in September from Growth to Value stocks such as the energy and financial sectors which have been lagging the broader market. This was the biggest such shift since the financial crisis began and there is plenty of talk about a “sea change” but we would want to see more evidence that this theme can be sustained.
In our Relative Strength analysis, the U.S. remains strong justifying our ongoing overweight position. Our general Global Markets sector along with Europe as a region have weakened but not enough to trigger any action yet. We wrote last month that we had Japan “on watch as a potential area for investment should conditions improve”. For the first time this year Japan has now moved high enough in our Relative Rankings to warrant our interest. We will take a position if Japan continues to strengthen and global markets generally pick up more from their August lows along with an improvement in our overall market indicators.
Boris Johnson won the Conservative party leadership contest and became the new Prime Minister. Tory MPs seeking to prevent a no-deal exit were expelled from the party. Parliament was suspended but subsequently reinstated after the decision to prorogue was judged unlawful by the Supreme Court. Currently we appear to be in the end-game because as we write (17th October) it has been announced that a new Brexit agreement has been reached with the EU and Boris Johnson says he is confident he can get the deal through parliament.
The Pound continued to weaken over the last quarter falling to a multi-year low in September but has rallied over the last few days on renewed optimism that a new deal can be reached with the EU.
Despite historically low yields including $15 trillion of bonds that now carry a negative yield, bonds have remained in demand. All Bond sectors were higher over the quarter, largely due to lower interest rates and safe haven buying with worries over the U.S./China dispute and global growth concerns. We have written previously that “bonds have rallied strongly this year and in a technical sense are overbought but we don’t see any weakness yet”. However, most Bond sectors made highs in early September that have not yet been retested, so there has been some weakness. We will be monitoring bond sectors closely.
Central banks eased monetary policy in the third quarter attempting to bolster economies and the U.S. Fed cuts rates for the first time in ten years. The Fed cut interest rates again in September citing “uncertainties” about future growth and saying that the cut was to shore up the economy. The Bank of England has held rates but remained cautious. In Europe, Christine Lagarde was nominated to take over from Mario Draghi as ECB leader at the start of November. She has made it clear in the past that she supports his views on monetary policy and it is therefore seen as unlikely that she will change course.
The U.S./China trade dispute is continuing to create uncertainty with a knock-on effect for businesses where investment has been slowing, reflected in a general weakening in economic data globally. The impact of the dispute on the global economy is now becoming apparent with forecasts for growth being lowered, notably in Japan and Germany.
As mentioned in our latest monthly update, there are plenty of issues that could stir or unsettle the markets, not least with the impending deadline for Brexit and the continuing U.S./China trade dispute adding further uncertainty to investment markets. As we move beyond these events, we believe investment markets will adapt thereby offering further opportunities to invest.

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