Market review: mid-year reflections and what could lie ahead

Andrew Milligan

We’re almost halfway through the year and there’s still no resolution to the US-China trade war. Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, considers what this means for investors and what the implications are for the global economy. He also looks at how emerging markets are faring, whether UK interest rates will change, and the impact of May’s European Parliamentary elections on the Eurozone.

The US-China trade war rumbles on

Investors are definitely on a roller coaster ride full of ups and downs as a result of the ongoing US-China trade war. Not only are there complex trade negotiations and technology transfer rules to understand, but we’re also dealing with an unusual backdrop where Presidential tweets and strident Chinese government responses cause markets to swing sharply.

There’s a possibility that a lot of what we’ve witnessed is political posturing for domestic audiences in both countries. It could be that at, or soon after, the G20 summit in Tokyo in late June, an agreement is reached and the world can breathe a sigh of relief.

More likely though, we’ll see a drawn-out series of talks which may not reach agreement for months, if ever. Both sides are getting entrenched and the stakes are rising, especially for sensitive sectors such as technology or agriculture. This doesn’t mean a full-blown trade war or global recession is imminent – that wouldn’t be sensible for either President at this moment in time.

At Aberdeen Standard Investments, we expect recovery in global business activity to be even more muted than originally forecast. Rates of growth will be slower, with businesses delaying investment, changing their supply chains and building up stock levels. Meanwhile, consumers will respond too by changing what they buy as new and higher tariffs start to have an impact on prices. In this environment, active stock picking to identify the winners and losers is even more important.

Emerging markets – where there are losers, there will be winners

As global trade is affected, it’s no surprise that emerging markets have come under pressure. There have been outflows from many equity and some bond markets in these regions so far this year. At the time of writing, Asian markets are only up about 0-5% year-to-date, while the US stock market is up closer to 10-15%.

In these circumstances, it’s important to look at emerging markets by region, and sometimes by country, as there’s considerable diversity. For example, trade pressures are having a much bigger impact on companies based in Asia than on those in Latin America and Europe.

On a regular basis, we measure how strong or fragile emerging markets are in a number of important areas, such as their current account and debt levels. These can help our fund managers look for opportunities, or where to steer clear.

But where there are losers, there will always be winners. Already it’s clear that more firms are considering or planning on moving business operations, from China to Vietnam or Korea for example.

A key measurement we’re currently looking at is the level of the Chinese currency, the renminbi, versus the US dollar. If the renminbi suffers a major devaluation this would put extra pressure on many emerging market economies.

An ancient Japanese proverb says even monkeys fall from trees

Japan’s economy unexpectedly grew in the three months to March suggesting estimates for a contraction in the world’s third largest economy were incorrect. The fact is Japan isn’t an easy economy to forecast and, as the proverb suggests, sometimes the experts do get it wrong.

The Japanese economy grew faster than expected in the spring. This reflected a milder-than-anticipated retreat in private investment, a surprisingly strong boost from overseas demand and an unexpectedly positive contribution from companies building up stock levels. However, these were just provisional figures so significant revisions to growth estimates wouldn’t come as a surprise.

At Aberdeen Standard Investments, we’re quite positive about Japanese equities. Despite volatile economic data, we expect Japan to grow moderately this year and next, and believe it’s a market worth keeping on the radar. In particular, we like the fact that corporate governance is improving in Japan, and the government slowly but steadily pushes through with economic reforms, all leading to better returns to shareholders.

UK interest rates on hold

The Bank of England has kept interest rates on hold amid continued uncertainty over Brexit – a situation made even more uncertain by the Prime Minister’s recent resignation and the results of the EU elections. Investors want to know if the Bank will raise interest rates in the second half of the year, if a no-deal Brexit is avoided.

The truth is the Bank has an unenviably difficult task in front of it. On top of the normal economic cycle, there are changes to global monetary conditions, activity in key overseas export markets, plus a growing degree of political sensitivity to contend with. Such uncertainty does not just relate to Brexit but also a possible UK general election in the coming year.

For now, we believe it’s likely that the Bank will have to keep interest rates on hold. As with many central banks, it is ‘date dependent’; if there is a very strong theme in terms of economic growth or inflation pressures, it will act. Until then it will keep its powder dry.

The Eurozone’s strengths and weaknesses

Issues affecting Germany and Italy recently prompted the European Commission to reduce its forecast for growth across the European Union (EU) to 1.4% this year – just above what it expects for the UK.

It’s worth noting that the growth forecast for the whole of the EU masks some areas of strength, such as Spain. But it also masks areas of weakness. For example, Italy is forecasting that its economy might only grow by 0.3% this year and weak activity in Germany’s manufacturing sector is certainly continuing into the second quarter.

The results of the EU Parliamentary elections will be important for activity in 2020. We’ve seen substantial losses for the two main groups, the centre-right European People’s Party and the centre-left Socialists and Democrats. Meanwhile, the Greens and Liberal groups have made gains, as have the right-wing nationalist and populist groups. What does all this mean for the Eurozone?

I suggest that the results of the EU elections are more important for individual countries than for the region as a whole. For example, strong populist support means we expect Italy to press for more public spending and tax cuts to boost its economy. Such discussions are likely to be long and complicated, especially as key personnel at the EU Commission and European Central Bank (ECB) will be replaced in coming months. If politicians cannot press ahead with economic reforms, so the pressure continues on the ECB to keep interest rates at these historically low levels.

On balance, we remain neutral on European equities. Profits growth does not look as strong as in other parts of the world. However, as they’re generally unloved by global investors so there are opportunities for active stock pickers in some companies and sectors.


The information in this article should not be regarded as financial advice. Please remember that the value of an investment can go down as well as up and may be worth less than was paid in.

Information is based on Aberdeen Standard Investments’ understanding in May 2019. The views expressed in this article are those of the author and not Standard Life Assurance Limited.