World Market Review April 2019

As global trade tensions have tempered, markets have recovered over the start of this year up to levels where valuations are no longer cheap relative to historic averages. Strong Q1 corporate earnings have supported this rebound and China has started to produce more promising economic data, lifting global hopes of prolonged growth through this economic cycle.

Brexit has been extended until Halloween (Thursday, 31^st October). This extension has had a minimal impact on the UK stock market as well as the value of Sterling as the extension seemed inevitable. The likelihood of a no-deal seems to have evaporated as no party seeks this resolution, but we are no closer to reaching an agreement with the EU and the current state of limbo is still damaging to the economy. This being said, we are still optimistic on the UK outlook as corporate earnings and fundamentals continue to show strong signs and consumer spending still appears to be ignoring the Brexit chaos. Our Castlefield CFP SDL UK Buffettology Fund achieved 11.2% growth in April, surpassing benchmarks and outperforming peers.

The US Federal Reserve (Fed), has reiterated policy of steady interest rates as we remain patient and await future economic data. The easing of trade tensions is clearly good news for US markets as both the S&P 500 and NASDAQ breached their all-time highs over the final two days in April. Regardless of the slow-down in the global economy, US tech stocks such as Amazon, Microsoft and Facebook all outperformed growth expectations. Donald Trump and the Fed both seem aligned in extending the economic cycle as President Trump gears up for his 2020 re-election bid. This is likely to relieve the rhetoric for trade tensions worldwide, improving the outlook for many economies.

Central Banks across the world are holding interest rates steady as they wait for economic data to develop. With no doubt, Emerging Markets have reflected some of this relief and the positive news around trade has also helped the macro environment in China. Chinese domestic equities lost some momentum in April after the strong surge in Q1 as the government may be reducing some of the planned stimulus in light of the positive improvement in growth.

Indian election polls will be counted on May 23^rd to determine whether the right-wing Prime Minister, Narendra Modi, would be elected for a second term of five years. India has been one of the fastest growing economies in the world with growth averaging roughly 7% over the last 5 years. Modi is considered the front runner to win the upcoming election, however, questions still remain whether he will be able to live up to his economic promises.

Europe will be one of the biggest beneficiaries out of the optimism emerging from Chinese stimulus, one of Germany’s leading trade partners. We are expecting this to boost the regions growth outlook, but the limited upside potential would still remain. Trade between Europe and the US also needs to be tackled in the near future. This forms the largest bilateral trade flow in the world, with EU exports to and from the US in 2018 estimated to be €406bn and €267bn respectively. Huge global impacts will be felt if these two economies decide to clash but it remains unlikely that the US initiate any such escalation before the next presidential election as this would ultimately hinder economic growth.

Emperor Naruhito’s accession has now been formalised and he has pledged to fulfil his role as a “symbol of the state and unity”. A focus will remain to keep aware of the need for corporate governance reforms, including the unwinding of cross-held shares which had previously been used to cement business ties. As these cross holdings diminish, management productivity and profitability should both increase. We see opportunities in Japan among the smaller cap companies that are more domestically focused and are therefore less affected by a slowdown in global demand. With this increased asset efficiency, we expect the market to recognise and reward companies creating better shareholder returns. Our Legg Mason IF Japan Equity Fund managed to outperform local indices once again as it increased 5.6% in April.

Although the US and China have come to a slight resolution over global trade, tensions are likely to persist as these economies go head to head over global dominance. We still prefer to minimise our equity risk throughout Europe as the region continues to face many hurdles and also lacks a catalyst for significant outperformance. We expect a volatile market as we move forward since the global economy continues to focus on politics rather than market fundamentals.