As at 22 October, the return on the LD Discretionary fund stands at 6.5 per cent (year-to-date). Since April, there have been a number of fluctuations in the equity markets, but the global equity market has delivered a high positive return. This has been driven in particular by growth and quality shares. At sector level, it is IT and technology companies that have had a positive impact on returns. Credit markets have, on the whole, followed the trend in the equity markets in 2019, and credit spreads generally narrowed up until mid-April. Since April, credit spreads have fluctuated in line with movements in the equity markets. LD Pensions’ other portfolios have also generated positive returns.
Economic slowdown in the US
2019 has been characterised by the major economies being in the late stages of the economic cycle. Concerns about a recession in the US and, in particular, in Europe have been mounting. The US economy has been experiencing a historically long economic expansion. The eurozone economies have never managed to match the pace of the US economy, and it is clear that they continue to grapple with structural challenges leading to low inflation and low GDP growth.
The US President has announced and imposed tariffs on imports and services from China. These announcements have affected the financial markets and are beginning to impact earnings forecasts globally. Leading indicators for the production and manufacturing sectors have been falling throughout 2019, and new orders have also been declining. This is likely due to the trade war between the US and China, where uncertainty is causing companies to adopt a cautious approach.
Record-high employment in the US is supporting wage growth and private consumption. Furthermore, consumer confidence suggests that US consumers are not being affected by the turmoil in the financial markets to the same extent as businesses. Close attention is therefore being paid to whether employment and private consumption in the US begin to show signs of weakness. There has, in fact, recently been a slight slowdown in employment growth, and consumer confidence has also shown signs of weakening.
Falling interest rates
The US central bank, the Federal Reserve, has cut its key interest rate twice in 2019 by 0.25 percentage points. The target range for the key interest rate is now 1.75–2.0 per cent. The ECB launched a new bond-buying programme this summer and will purchase EUR 20 billion worth of bonds per month from November 2019. The short-term interest rate was also cut by a further 0.10 per cent to -0.50 per cent. The ECB’s President, Mario Draghi, has been a strong advocate of the new bond-buying programme. However, there appears to be disagreement within the central bank’s Governing Council regarding the impact of a new bond-buying programme. The marginal effect is expected to become increasingly smaller, whilst monetary policy is imposing significant costs on the European banking sector.
Interest rates have therefore fallen sharply over the past six months. In September, 10-year German government bonds were trading at an effective yield of -0.75 per cent. Since then, interest rates in the euro area have risen slightly again. German 10-year government bonds are currently trading at a yield of -0.60 per cent. The low interest rates have also had a knock-on effect here in Denmark, where there has been a high volume of mortgage refinancing among Danish mortgage borrowers. On 31 July 2019, mortgage loans totalling 178 billion Danish kroner had been terminated, which is a record high.
Emerging markets have been characterised by political events. Of particular note are the demonstrations in Hong Kong and heightened tensions in the Middle East, Iran and Saudi Arabia, as well as a Turkish offensive against Kurdish forces in Syria. Consequently, the Argentine share index fell by almost 50 per cent in August following the election of a new president.
An uncertain future
In LD Pensions, a number of economic growth indicators are monitored. Overall, the signs are discouraging, and a slowdown in global growth is therefore also expected. However, there are also factors pointing in the opposite direction. If the US and China succeed in reaching an agreement to de-escalate the trade conflict, this will be positive for global growth.
