Monthly Update | parliament packs up and trade war takes toll

While Westminster reels from a surprise parliament shutdown, Washington and Beijing up the stakes in their trade war. Meanwhile, anti-government protests in Hong Kong continue to escalate.

This has all added to the general sense of uncertainty chipping away at investor confidence, and markets have had a tough time as a result. Although most equity prices recovered by the end of the month, America’s S&P 500 and Dow Jones Industrial indices recorded their worst trading days of the year in August, and the UK’s FTSE 100 hit a six-month low. 

Consumers still confident but manufacturing in slowdown

Consumers remain the ray of sunshine in the UK and US economies. Consumer confidence is still at high levels and employment is strong. 

Manufacturing sectors are being impacted by a global slowdown, but that’s why central banks stand ready to provide support. Overall, the world economy still grows, even if at a slowing pace.

The current market swings are in part seasonal. We usually see a traditional summer slowdown in market activity as investors swap trading for travelling, and this makes those markets more susceptible to sudden shifts.

Parliament shutdown fails to move markets

It’s worth remembering the clear distinction between politics and economics at such times. While the US-China trade war is undoubtedly hitting countries’ exports and therefore denting market performance, the UK parliament shutdown decision actually had little impact.

Coutts head of investment strategy Sven Balzer explains, “Sterling slipped a little on the news but that was about it. Investors are in ‘wait and see’ mode given the many potential scenarios that could now play out – including the possible reversal of prorogation. 

“With sterling weak against the US dollar, markets are pricing-in a somewhat harder Brexit outcome, but it is difficult for investors to have much conviction in any one conclusion at the moment.”

Sven adds that the best investor response is to stay calm. 

“We will continue to see alarmist news headlines about Brexit and politicians being provocative to ram home their points,” he says. “But in our view the best thing to do is to step back from all the rhetoric and speculation, remain disciplined in your investment approach and stay focused on the fundamentals.”

Coutts plays it safe but looks for opportunities

We have kept our client portfolios and funds well diversified and positioned them more defensively to reflect the current political landscape and slowing economic growth. 

Sven says, “A couple of months ago we reduced our investment in equities, taking some good profits, and added to government bonds. 

“Even within our exposure to equities, we tilted our portfolios towards developed markets and focused on regions that are generally more appealing when growth slows. This includes buying more US stocks which, albeit expensive, give exposure to high quality companies and continue to deliver strong returns.”