Monthly Update | Can markets maintain momentum?

China attempts to add buoyancy

We think that stimulus from the Chinese government is likely to stem the decline in economic data, but it remains to be seen whether positive movement can be reignited.

The latest official data showed that China’s economy grew by 6.6% in 2018 – the slowest rate since 1990. Although in line with analyst expectations, the slowdown prompted fears about the global economy – China accounts for a third of the world’s growth and plays a particularly important role in emerging markets.

The country has introduced a series of fiscal and monetary measures to stimulate growth in the economy. They include injecting money into the banking system, more infrastructure spending and tax cuts.

China has been managing a transition from a manufacturing-based export economy to a more service-based domestic economy over the past few years, so some bumps in the road are to be expected. How the government navigates the situation is likely to have a significant impact on markets. In the meantime we are holding a modest positive position in China, which will benefit should the government’s measures bear fruit.

Markets cling to hints of trade negotiation progress

We have always believed that the US and China will find solutions to their trade dispute and recent talks have brought this closer, soothing market jitters.

Negotiators from the US and China ended their first round of talks since calling a truce over their trade dispute. Both sides are working towards reaching an agreement before 1 March, after which the US could raise its tariffs significantly if the issues aren’t resolved.

Our view remains that these two economies have more to lose than gain from a trade war. We believe both sides will reach a compromise.

We like Japan, but…

We’ve scaled back our position in Japan as we see a stronger yen and slowing global growth reducing the potential for gains.

The Japanese economy performed well in 2017 but growth was lacklustre in 2018 and ran out of steam in the final quarter. Whilst we continue to have confidence in the long-term outlook – due in part to corporate profitability and reform – the slower global growth in general is currently a headwind for the country. Returns from Japanese equities also tend to fall towards the end of the business cycle as the yen rises, boosted by its status as a safe haven currency.

Our overall position in Japan is neutral, rather than negative, and so we still see potential for gains, but we’ve taken some of our exposure and added it to our cash holdings for now, ready to deploy as new opportunities appear.

Brexit bugbears

While Brexit uncertainty casts a shadow over the UK, we have a positive view on large-cap UK equities that are more closely connected with the global economy.

A tumultuous month in Parliament saw MPs reject the UK government’s agreement with the European Union, then support a government-backed proposal to renegotiate the ‘back stop’ arrangement for the Irish border.

Investors seem largely inured to Brexit turmoil, being more concerned with US interest rates and the US/China trade dispute. Sterling strengthened in January as the Brexit news unfolded more or less in line with market expectations, and the stronger currency hurt UK large-caps. But as the pound settled later in the month, UK equities came back with the MSCI UK Index returning 3.7% over the course of January.

While this highlights the vulnerability of UK equities to currency moves, we have a generally positive view based on attractive valuations and income streams. Brexit uncertainty may be casting a shadow over the UK but the fate of large-cap UK equities is more entwined with the global economy, which remains robust.

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.