(1st July – 30th September)

Highlights:

• Despite deepening trade wars, the US was the top performer this quarter with growth in both the economy and earnings.
• August marked the US’s longest bull market in history with IT and Pharmaceutical sectors showing the greatest performance.
• European growth has been positive but not stellar as ongoing worries about Italy and Turkey have added to trade war tensions to dampen investor appetite. No policy change announced by European Central Bank.
• Brexit continues to dominate talk of the UK’s economy as the possibility of a ‘no deal’ has taken its toll on mid cap companies. Such news has helped the continued decline of sterling. Despite this the economy exceeded expectation with a heatwave boosting retail and service sectors.
• UK unemployment remains at a 40-year low although wages are not expected to grow in line with inflation which is forecast to be 2.2%. In order to bring this more in line with the Government target of 2% the Bank of England has agreed to increase interest rate to a post crisis high of 0.75%.
• Asia and Emerging Markets have had a rough quarter with China hit hardest. August brought fresh tariffs from the US targeting $200bn of Chinese goods followed by China’s response of imposing a tariff of $60bn on US imports.
• Elsewhere, India faced headwinds from a weakness in the rupee and rising inflation and Turkey hit headlines with a sell-off in the Lira and growing political tension over debt and inflation. Thailand, Malaysia and Taiwan had a strong quarter with energy and financial stocks leading the growth.
• Despite suffering two natural disasters, Japan has shown solid gains this quarter.
• Interest rate increases have been introduced by both the US and the UK. In the UK rates have risen to a post-crisis high at 0.75% whereas in the US the Fed announced their third increase this year with 10-year yields rising to 3.06%. Italian bond yields rose after ongoing debate regarding the countries budget and emerging market bonds struggled in the face of a strong dollar.
• UK residential property continues its slowdown with London prices declining slightly compared to last year. The areas showing the greatest price growth were the East Midlands and the South West at 2.8% and 2.0% respectively.

US:

US equities had another strong quarter which lead to them outperforming other major regions with robust economic and earnings growth. This positivity has however sat alongside ongoing concerns around the escalating trade war between the US and China with tariffs introduced in both July and August (with further increases due in 2019). Despite this, in August the US officially set records for the longest bull market in history. Much of the growth can be attributed to pharmaceutical and IT companies which showed strong performance over the quarter. At the other end of the spectrum the energy sector slumped with US oil companies suffering under the threat of China’s possible tariffs/import decrease. Other casualties include the materials and automobile industries who have been caught in the crossfire this quarter.

Interest rates have continued to rise with the Fed hiking their rate by 25 basis points and reaffirmed their view to have further gradual increases in 2019. This has continued the theme of a flattened US yield curve with short term interest rates rising faster than long term rates.

Eurozone:

European equities were positive although not stellar with the MSCI EU Index showing 1% growth over the quarter, although this growth was slower than previous quarters. Similar to the US, healthcare stocks showed strong gains with another strong performer being energy stock (boosted by higher oil prices). This increase in energy costs has fuelled an increase in eurozone inflation back to 2.1%.

This quarter was rough for many of the Eurozone banks amid concerns of emerging markets (Turkey in particular) and worries over the Italian budget. There was no policy change announced by the European Central Bank who have said interest rates would remain on hold until ‘at least through the summer of 2019’. Europe couldn’t escape the effect of the ongoing trade wars with worries over automobiles the focus of many. These fears were slightly alleviated by a meeting between US President Trump and EU President Juncker in July which resulted in an agreement to work towards zero tariffs on non-auto industrial groups with new automobile tariffs to be put on hold pending further discussion.

UK:

In the UK, fears surrounding Brexit continued with the possibility of a ‘no deal’ have continued reflecting in poor performance for many UK domestic companies, mid-caps have been his hardest with a decline of -1.78% in the FTSE 250 compared to declines of -0.66% and -0.82% in the FTSE 100 and FTSE All Share respectively. Worries over the UK economy also helped continue the decline of sterling over the quarter. The escalating global trade war has had an impact on the UK economy, especially on sectors exposed to emerging markets including financials and mining who have seen poor performance. Despite these factors the economy exceeded expectations this quarter with robust growth in the services and retail sector which may have been boosted by the heatwave that covered the first 2 months of Q3. Unemployment also remains at a 40-year low although wage growth is not expected to beat inflation as it is set to rise around 1.3% compared to an inflation forecast of 2.2%. In order to help meet their 2% inflation target the Bank of England unanimously voted to increase interest rates to an al-time high time since the financial crisis bringing the Bank of England base rate to 0.75% in response to a strong labour market and credit growth. Although this will increase the cost of borrowing, the increase will help boost savings held in cash.

Asia and Emerging Markets:

Asia and the emerging markets have generally had a poor quarter, led by China who was hit by several new rounds of tariffs imposed by the US worth $200bn, China’s response has been to introduce a tariff list of $60bn US imports with possible future increases on both sides. Chinese authorities have also started tightening their monetary policy and implemented a more rigorous approval process for local government spending. Elsewhere, India has suffered headwinds stemming from a weakness in the rupee and rising inflation – no to mention the ever-present trade war worries. Turkey also hit headlines after a sharp sell-off in the lira with increasing geopolitical risk, rising concerns over debt and the countries’ above target inflation rate. Elsewhere, Thailand has made strong gains with energy and financial stocks leading the growth. Nearby, Malaysia and Taiwan also exceeded expectations providing solid performance. Japan endured Typhoon Jebi and a Hokkaido earthquake but managed to produce respectable gains. Moving forwards, it is clear that national debt and trade war tariffs will continue to be the main themes for most of Asia and the Emerging Markets.

Bonds:

The Bank of England and Fed both implemented rate hikes this quarter. For the UK this marked the highest rate since the financial crisis at 0.75%, in the US this will be the third rate increase this year alone with US 10-year yields rising from 2.86 to 3.06%. Amid political concerns, Italian 10-year government bond yields rose to 3.15% with the announcement of their fiscal targets for 2019. Generally corporate bonds saw positive returns although this greatly relies on the strength of local currency. Similarly, Emerging Market fixed interest investments have struggled against a strong dollar.

UK Property:

The earlier heatwave has proved to be a benefit for retail property to give around 2% growth in the quarter, well above the 2017 average of 0.3%. Rising costs are keeping high street shops under pressure with retailers with a strong online presence continuing to perform better. In London, overseas investment continues to dominate the market for office space, accounting for >70% of investment in the year to date with interest in office space expanding to include the South East too due to steady demand and limited space. The industrial sector has declined, partly due to Brexit fears and the value of sterling with business confidence at a 22-month low. Residential property values showed small amounts of growth with mortgage approvals in line with the 12-month average (64986). First time buyers have put down record levels of deposits for their first home with the national average at £33,127.  However, London property remains in the grip of a slowdown with a drop of around 1% year-on-year giving an average house price of £475,000. The ONS released annual rent growth figures in August showing annual growth of 0.9% with the East Midlands topping the league table at 2.8% followed by the South West at 2.0%. Again, London was the worst performer with a decrease of 0.3%. As with anything UK-based the outcome of Brexit it expected to bring increased anxiety, especially in the capital.