Autumn can be a blustery time of year

Autumn 2018

With the long, hot summer of 2018 now behind us, it appears that the heat is continuing in global markets, with significant volatility in October 2018 as an example.

There is much to consider and on the geopolitical and financial agenda at the time of writing, one key issue is the US mid-term elections in November.

It is widely agreed that the results of the mid-term elections will be hugely important both in terms of the Trump presidency and in shaping the US political agenda for the years ahead. If the Republicans lose control of either the House of Representatives or the Senate, the party's ability to push through legislation would be severely hampered. Were the Democrats to win control of the House or the Senate, they would have the opportunity to reject new bills and could also gain subpoena power, which could prompt a more detailed and determined investigation of the Trump administration.

Other significant points on the agenda are:

  • Trade tariffs and trade wars
  • Brexit negotiations and the passage of any agreed through Parliament
  • The Chancellor's Budget at the end of October 2018, with an agenda of significant funding needs for the NHS which will need to be paid for from other areas (speculation abounds at this time!)
  • Steadily rising interest rates in the US (it appears much to the annoyance of President Trump)
  • Italian Budget / spending plans which seem to be un-nerving European markets
  • Indications of a slowdown in global growth
  • Inflation appearing to be on the rise globally

From a UK perspective for interest rates, the challenge for the Bank of England will be to maintain a balance – too sharp a rise now could put pressure on the UK economy and consumers; however, leaving it too late could allow inflation to become entrenched, making it harder to control and potentially forcing the Bank to make sharper hikes further down the road.

Some central banks (America, China & Canada as recent examples) have been gradually raising base rates from historic lows over 2018. This might be a welcome change for savers who have endured historically low deposit returns for many years, but not so welcome for borrowers.

Please be assured that the list above is not exhaustive and none of the indicators and possible changes are guaranteed, but they do provide a flavour of what we can consider as we head into the winter of 2018.

It is also important to note that we have seen falls in equity markets on the back of some of these concerns, or a combination of these concerns, or just that sentiment at this time is mixed.

Against this backdrop, and to provide balance, we also need to consider the following points for future investment strategies. In times of volatility, it is important to reference back to a long term view of the world, so that we can retain some perspective as long term investors, whilst the market worries about the shorter term:

  • Modest growth is predicted for the world economy next year
  • The economic cycle is getting old, but we do not therefore consider that the positive growth part of the cycle is about to end. There is little sign in the equity market of speculative excess, and many investors remain level-headed or pessimistic
  • The digital revolution will continue to have a big and disruptive impact on markets and 'legacy' companies
  • The US is likely to grow faster than the rest of the developed world next year, although we note that the one-off effect of President Trump's tax cuts will reduce next year

Looking at employment and inflation in other global areas, we note (further comment on the US position below):

  • The UK economy is growing at a slowing pace with above target inflation and low unemployment
  • The euro zone economy is growing at a moderate pace with moderate inflation and high unemployment
  • The Japanese economy is growing at a slow pace with near zero inflation and low unemployment
  • The Chinese economy is growing at target rate with moderate inflation and low unemployment

The senior team at Chapters Financial meets and is briefed on the current economic climate and relevant data in order to inform our 'house view'. We aim to meet once a quarter and to ensure our process remains robust, we also use the services of an external consultant, Steve Williams of Cormorant Capital Strategies. For information, their website can be found here: http://www.cormorantcapitalstrategies.co.uk/

Steve Williams produces a regular macro-economic review document and, with his kind permission, this is reproduced here. We find these updates helpful in considering the current economic conditions.

Looking at the employment figures in the US, Steve has recently noted, under the heading 'Solid':

The consensus called for an extra 180,000 new jobs to be posted in September's nonfarm payroll count. In the event the actual number recorded was just 134,000 – the lowest count in a year.
It's not immediately clear why the jobs report fell short. Hurricane Florence struck late in the week during which households were surveyed about their employment status so one would expect the effects of the storm to be a comparatively weak contributor to the numbers. Nevertheless, that remains the best explanation at this stage. The report did provide evidence of lost jobs in retail and leisure/hospital sectors that would be consistent with impacting bad weather.
Not that it matters. Beyond the headline payroll count were some nuggets of information that are entirely consistent with a booming US economy. For a start, the July and August figures were revised upward to bring the average monthly job gains total to 211,000 over the course of this year – considerably more than the 182,000 average for last year. Indeed, September represents a record 96th consecutive gain for the labour market.
Wage growth came in at 2.8 percent, down from 2.9 percent previously, but solid nonetheless.

No individual asset allocations, advice or recommendations are provided during the course of this article

We hope that this update is helpful. As you would understand, this provides no individual advice or guarantees of future performance but does give an insight into current economic conditions.

Keith Churchouse FPFS

Director

CFP Chartered FCSI

Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899