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The Charles Stanley Investment Strategy Committee met to review markets and the economic outlook. Here are its conclusions.

The Charles Stanley Investment Strategy Committee met to review markets and the economic outlook. Here are its conclusions.

by
John Redwood

in Features

16.08.2019

 

When the Investment Strategy Committee met this week it had difficult judgements to make. Bond markets are signalling a recession, whilst the US and the technology-driven economy look set to deliver more growth. It is true there is a worldwide manufacturing recession, with particular problems in the vehicles industry created in part by demands for urgent transformation of the product range and new regulations. Services are faring better. There is decent growth in real wages and service activity in many leading economies, and this remains the largest part of a modern advanced country’s economic activity.

Germany is at the centre of the economic storm. GDP change went negative in the second quarter, and prospects for the rest of this year stay weak. China has slowed a bit, with markets wanting more stimulus than the government has so far come up with. Italy was in recession in the second half of last year but has stumbled out of it in 2019. The Committee confirmed its view that there should be be modest growth worldwide this year, with the US, China and the Euro-area as a whole all avoiding the recession some in the markets fear. The bond markets have created ultra-low yields in expectation of more stimulus to extend the long cycle, rather than as a direct forecast of an imminent recession in the large economies like the US and China.

We have been warning for some time that equity investors should not expect the fast pace of share price advances and good returns of the first half of this year to continue, nor for the market to rise continuously. There will be set backs on bad news, often related to the willingness or unwillingness of Mr Trump to do trade deals. The latest sell off has occurred following the lack of progress in the US/China trade talks and the decision of the USA to impose tariffs on a wider range of imports from China. The escalation of the Hong Kong protests is also hindering progress, with pronounced weakness in local share markets the natural consequence as news comes of airport closures, mass street protests and possible Chinese “forceful retaliation” to assert control.

The Committee drew attention to the $17 trillion of bonds now so expensive they offer a negative yield. Others bonds have also mainly risen in price as investors seek out some yield against this background. Bonds continue to look very expensive. The Committee continues to prefer US Treasuries amongst the higher-quality bonds for the extra yield they still do offer, and dollar denominated emerging market sovereign bonds for those willing to take more risk to get a higher income. Argentina is a timely warning that some emerging-country bonds are dangerous given the lack of market confidence in future Argentinian economic discipline, though the main emerging economies offer something a bit more stable.

With better dividend yields than most bond yields, global equities appear better value on a medium-term view. Any further weakness of trade and recession fears could present a buying opportunity for investors who can afford equity risk. The Committee continues to prefer US over Euro-area shares. It downgraded Asia ex-Japan from “positive” to “neutral” to recognise the continuing difficulties faced by Hong Kong, the delay in China resolving the trade conflict with the US, the slowness of Chinese measures to boost their growth rate and the trade vulnerability of economies such as South Korea. Australia however, looks a better prospect, with the government and central bank taking action to promote more growth.

The Committee also moved a little more positive about gold and precious metals. In an environment of little or no return on cash, the opportunity cost of holding these metals is reduced. At a time of uncertainty and fears more people are minded to hold some as a precaution, whilst it looks as if several Central Banks want to add to their positions. These metals remain risky with no income return, so they should only be used where risk budgets allow, as an asset which can perform differently from bonds and shares at times of worry.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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