World Market Review February 2019

We have seen a rise across major global markets for the second consecutive month in February as stocks edged higher in light of positive developments. Markets have surged on trade war optimism, the Fed has provided reassurance on its dovish stance and Chinese monetary stimulus has started to gain traction.

Teresa May has carried Brexit into its final month with a no deal in place. This might ultimately be good politics, but it has certainly had its effect on the UK market and its outlook. It is no surprise that investors have been deterred and have been consistently underweight towards UK equities, in particular, the domestically-exposed equities. We see a strong opportunity in the near term as recent uncertainty still persists and continues to be a drag on the UK economy. Even with an extension to Article 50, it is likely that the UK Parliament would rule out the option for a no deal, thus bolstering investor sentiment and offering quick gains in the UK equities market. Our CPN portfolios benefitted from the TB Evenlode Income Fund rising 3.5% during the month, compared to the FTSE 100 index which only increased by 1.5%.

The US continues to grow as more job opportunities have increased consumer spending, even though attitudes deteriorated during the government shutdown. Substantial progress has been made over trade between the US and China, rallying global markets higher once again.  The Fed has not given any signals of a change in its stance in the coming months and said that future adjustments would depend on economic data. Due to its superior track record in investing in the best global large caps, we hold the Fundsmith Equity Fund across most of our portfolios. It is largely exposed to the US and gained 4.4% in February, outperforming most major global indices.

Chinese monetary stimulus is arriving, trade tensions are easing and a more dovish Fed, with prospects of a weakening dollar, is increasing investor appetite. China’s domestic A class shares also saw a strong turnaround after a difficult 2018 as the policy environment became more supportive. The Shanghai Composite reflected this with huge increases of 13.8% in February due to heightened optimism over a trade deal with America. Additionally, the MSCI is set to quadruple the amount of China A-shares in its major benchmarks in 2019, providing more encouragement for international investors. Emerging markets still give the greatest opportunities as we move forward and we believe current valuations seem very attractive.

Europe has been plagued with slowing growth and signs of weakening momentum persist. There still remain many areas of uncertainty which is likely already having a negative impact on investment activity whilst there is not much in place to stimulate growth. Already with benign quarterly GDP growth of 0.0% in Q4 2018, Germany would feel a notable effect on its economy if the US introduce higher tariffs on foreign made cars. In Italy, the populist government is becoming more radical ahead of the European Parliament elections in May, reducing investor confidence even further. However, not all news is disappointing in Europe as the weakening euro would boost export competitiveness and a favourable resolution to Brexit would improve confidence in the region. This month, we reduced our European exposure as the region is filled with uncertainty and lacks growth prospects. The surplus was attributed to the RWC Global Emerging Marks Fund.

Strong corporate balance sheets alongside attractive valuations gives us reason to still invest here. However, we see no immediate catalyst that will boost growth, so we remain neutral. The Japanese economy slowed last year due to a long run of natural disasters but the outlook in 2019 is supported by political stability among shareholder-friendly corporate behaviour. The Legg Mason IF Japan Equity Fund increased 6.3% in February, benefitting our more adventurous portfolios.

Trade tensions and Fed guidance now look to be more optimistic, supporting our view of subdued but continued global growth. This switch in sentiment over the last few months has generated positive returns from significant changes in risk appetite and stock valuations. As we move forward, we will be focusing on the evolution of other potential catalysts. Brexit will continue to cause significant market volatility and as Chinese stimulus matures, we will be closely analysing the economic developments.