As at 23 August 2019, the year-to-date return for LD Discretionary stands at 6.0 per cent, and for the last 36 months it stands at 13.6 per cent. The return on the LD Discretionary portfolio is satisfactory, given the portfolio’s risk profile and the framework for the allocation between shares and bonds, with half of the portfolio invested in gilt-edged bonds and a quarter in shares.
The trade dispute continues to dominate the headlines
There have been a number of events over the summer which have caused turmoil in the financial markets and led to falling share prices. Once again, it is the trade conflict between the US and China that is creating uncertainty for exports and order intake around the world. At the end of July, President Trump announced that tariffs would be imposed on imports from China worth $300 billion during the autumn. These announcements are affecting the financial markets and have now also begun to impact earnings forecasts on a global scale.
The US Federal Reserve cut interest rates at the end of July, primarily because of concerns about a slowdown in the US’s largest export markets. The domestic economy, on the other hand, remains strong.
The US is experiencing record-high employment, which is underpinning wage growth and strong private consumption. Furthermore, consumer confidence in the US indicates that American consumers are not affected by the turmoil in the financial markets, which ultimately supports the US economy and growth. Conversely, business indicators in the US point to pessimism and caution regarding investment activity, particularly in the industrial and manufacturing sectors, where companies are nervous about the global economic situation.
The interest rate cut by the US Federal Reserve came as no surprise to the financial markets, which are expecting further rate cuts during the autumn. It is also expected that the European Central Bank will cut interest rates and/or resume its programme of purchasing European bonds in order to stimulate the eurozone economy.
Record-low figures in Europe
Germany, the EU’s largest economy, has shown weak economic indicators throughout the summer, including lower industrial production and disappointing GDP figures. Germany is not yet in recession, but both the IFO and ZEW indices – two key indicators of the state of the German economy – are at their lowest levels since 2011. Economic challenges and political turmoil are also very much affecting Italy, where, most recently, the Italian Prime Minister was forced to resign due to a lack of support.
At the same time, many European banks are under pressure from negative lending rates. It is a widely held view amongst economists that the eurozone faces structural challenges resulting in low inflation and low GDP growth. This cannot be resolved through monetary policy measures. Furthermore, there is a deadline for the Brexit negotiations this autumn. Following Boris Johnson’s appointment as British Prime Minister, the likelihood of a so-called ‘hard Brexit’ – that is, without a free trade agreement with the EU – has increased.
New figures from China for both industrial production and retail sales were lower than expected, and lending has begun to fall. In Hong Kong, there are large-scale demonstrations against Chinese interference in the judicial system.
The predominantly bad news has led investors to sell shares and buy bonds. Interest rates have thus plummeted over the summer, and German 10-year government bonds, for example, are trading at a yield of -0.60 per cent, which is a historic low. In mid-August, the US yield curve inverted, meaning that the yield on a 10-year US government bond is lower than the yield on a 2-year government bond. Historically, an inversion of the yield curve has resulted in a recession 12–18 months later. Whether this will also be the case this time is difficult to determine, as the US economy is otherwise strong. However, the likelihood of a recession has increased over the summer.
