Quarter 1 2019

Our market commentary has taken a slight change in direction, as we will now be producing a quarterly update, looking back at some of the political, economic, technological and environmental events affecting markets in the past three months. After the challenges and volatility we witnessed in the last quarter of 2018, let’s take a look at some events of Q1 affecting markets around the world.

The new year certainly started much like the end of 2018, after a very poor Q4. However, early volatility settled to an extent and equity markets have rebounded across the board.

UK equities rallied in line with global equities, against an undeniably uncertain political and economic outlook. The fears that drove the market lower in Q4, seem to have been somewhat alleviated.

Figures from the ONS show UK labour productivity has modestly increased. In the fourth quarter of 2018, it fell by 0.1% compared to the previous year, productivity is estimated to have grown by 0.3%. UK Gross Domestic Product (GDP) grew by 0.2% in the three months to January 2019, but remains weak, growing by 0.5% in January. The ONS largely attributing this to falls in the manufacture of metal products, cars and construction.

Brexit

You’re probably sick of it, but events have been astonishing recently, to say the least. In January, Theresa May warned the UK faced “uncharted territory” if Parliament rejected her deal; little did she realise how many times it would be rejected and quite how unchartered that territory would be. The bare facts to-date, without speculation, are:

• 23^rd June 2016, the referendum was held
• 29^th March 2017, the Prime Minister formally triggered Article 50 and began the two-year countdown to Brexit
• 14^th March 2019, following a House of Commons vote on 14^th March 2019, the Government sought permission from the EU to extend Article 50 and agree to a later Brexit date
• 20^th March 2019, the Prime Minister wrote to Donald Tusk, asking to extend Article 50 until 30 June 2019.
• 21^st March, EU27 leaders agreed to grant an extension comprising two possible dates: 22^nd May 2019, should the Withdrawal Agreement gain approval from MPs; or 12^th April 2019, should the Withdrawal Agreement not be approved by the House of Commons
• 29^th March 2019, the UK had long been expected to leave the EU at 11 pm
• 2^nd April 2019, the Prime Minister announced she will seek a further extension to the Article 50 process and offers to meet the Leader of the Opposition to agree a deal that can win the support of MPs

One really important point that seems to get perpetually lost in the debate; the EU is neither stable in its construct nor the finished article. Its future as a single entity is further complicated by the single currency, backed by the European Central Bank, which itself has considerable hurdles to overcome.

Leaving the EU might not look like its current construct in a few years’ time, but that’s about all we can assume. In any circumstance, repercussions have already been felt, some directly attributed to Brexit, others speculatively and some businesses using it as a scapegoat for other failings.

The automotive industry has been especially affected, which could be particularly damaging for local economies:

• Jaguar Land Rover confirmed 4,500 job cuts and the shift of some production to Slovakia
• Ford is axing 400 jobs at their plant in Bridgend
• Nissan is no longer building the X-Trail in Sunderland, as originally intended
• Porsche warned of a possible 10% surcharge on all new vehicles post-Brexit

James Dyson, one of the UK’s biggest success stories and leading Brexiteer, also announced he will be moving Dyson headquarters to Singapore, citing tax breaks and a UK skills shortage amongst his reasoning.

High street woes

More visible across the UK in Q1 is the continued downturn of the high street. There are localised attempts to re-energise or repurpose traditional retail space, but in February we lost national giants Toys R Us and Maplin with around 4,500 jobs.

Sports Direct tycoon Mike Ashley has been making a few headlines, but is he the saviour of the high street? Ashley’s portfolio already includes several sportswear brands, lingerie business Agent Provocateur, fashion retailer Flannels and significant shareholdings in French Connection and Debenhams.

In late 2018, House of Fraser and Evans Cycles joined the empire with £90 million and £8 million takeovers respectively. And Ashley has been circling the struggling Debenhams, who secured a £20 million bail-out at the 11^th Hour but continue to struggle.

King of the department stores, John Lewis, also felt the pinch. Profits were down 45% and the staff bonus declared is at its lowest level since 1953 for the near 84,000 employees. It could have been worse, however, as in January they warned the bonus could be wiped out altogether.

US

Across the pond, on 25^th January (and after 35 days) the Government finally reopened. The longest shut down in history estimated to have cost the economy $11 billion thanks to lost output and delayed spending after President Trump attempted to gain funding for his big, beautiful wall.

Since, a ‘national emergency’ has been called in an attempt to fund the project, and there has been threats to shut Mexico’s border completely, amid a migration surge. The potential disruption threatening trade worth billions more dollars.

overall, however, markets have steadily grown in Q1, thanks, in part, to the Fed confirming in January it would adjust planned interest rate hikes to compensate for slow economic growth after the Government shutdown. In fact, throughout Q1, the Fed settled further into a dovish stance, as growth was slower than predicted. By the end of the quarter, growth had dropped to a cautious pace and predictions for inflation and expectations for interest rate hikes followed.

By the end of March, US equities’ progress had dropped to a far more cautious pace as investors balanced the Fed’s accommodative tone with the broader implications for economic growth. As the quarter ended, the Fed lowered its projections for US growth and inflation, and reduced its expectations for interest rate hikes. The “dot plot” now shows no rate hikes this year and only one in 2020. The adjusted growth outlook caused the Treasury yield curve to invert – a signal historically associated with a pre-recessionary environment.

International relations

Leader Kim Jong-un appears to be deepening his relations with Russia, just weeks after US / North Korean talks broke down at the Hanoi summit in February. Russia’s interior minister made a visit to Pyongyang, sparking concern in the US that North Korea is attempting to build a relationship with Moscow should tensions with Washington rise.

In March, Mueller delivered his report into possible Russian interference in the 2016 election to Attorney General. Ultimately, finding no evidence, it did not exonerate Mr Trump of obstruction of justice, despite his public proclamation that the report was a “total exoneration” and that “after three years of lies and smears and slander, the Russia hoax is finally dead. The collusion delusion is over.”

Meanwhile, tensions in the ongoing US / China trade saga softened in the new year, as Trump agreed to delay imposing the latest round of tariffs following a series of seemingly productive meetings, positively impacting markets and the wider global economy.

Muddying China’s relationship with several countries, the world’s third largest phone supplier Huawei hit the headlines. First, over the arrest of the founder’s daughter in Canada for extradition to the US. Then, with US, Australia and New Zealand Governments blocking the use of Huawei to provide the technology for their 5G networks, citing security concerns.

The firm’s founder, Ren Zhengfei, is a former People’s Liberation Army officer so has close Government links. The apparent risk to national security comes from China’s National Intelligence Law, which was passed in 2017. It states that organisations must “support, co-operate with and collaborate in national intelligence work.”

The UK has admitted to ‘strains’ in the relationship with the tech firm and the National Cyber Security Centre, which is part of GCHQ, has asked Huawei to fix problems that pose risk to the network.

Finally, to lighten the mood, let’s remind ourselves that the US president thanked Apple chief executive Tim Cook, during a meeting at the White House to discuss technology, with; ”We appreciate it very much, Tim Apple.”