Investment update - October 2018

October was marked by significant volatility and declines in equities markets as trade tensions, Italian fiscal policy, and ongoing Brexit negotiations rattled investors. Global economic data, meanwhile, remains positive, albeit with some signs of cooling starting to emerge.

The IMF issued new world economic growth projections in late October, reducing expected global GDP growth by 0.2% to 3.7% in both 2018 and 2019 as geopolitical uncertainty and trade tensions increased. Among regions, emerging and developing Europe had the largest cut in projected growth, declining 1.6% to 2.0% for 2019, while the US, Eurozone, and a number of emerging markets were also downgraded.

Political headlines centred around the US midterm elections held on 6 November. Considered a plebiscite on the policies of US President Donald Trump, the elections saw the Democrats regain a majority in the House of Representatives. However, the anticipated “blue wave” of Democrat support failed to materialise, with the swing against the Republicans moderate by historical standards. Additionally, the Republicans retained control of the Senate, which could mean a more subdued two years in US politics in the lead-up to the 2020 elections.

US economic data continued to impress. Third quarter GDP growth beat expectations to record 3.5% year-on-year growth, however was well below the 4.2% figure to 30 June. Consumer spending increased by an impressive 4% over the quarter, but was offset by an 8% decline in business spending. Unemployment remained at a 49-year low of 3.7% and average hourly earnings reached 3.1%; their highest since early 2009.

Australia’s housing market continued its decline, with prices across the five major capital cities falling another 0.6% in October and putting the annual decline in the largest market, Sydney, at 7.4%; the sharpest fall in 18 years. In other economic news, sentiment data eased over the month, but remains firmly expansionary.

In Europe, the new Italian governing coalition’s draft budget, which forecast a deficit of 2.4% of GDP, was formally rejected by the European Union. The rejection heightened fears over the health of the Italian economy, with the spread of 10-year Italian government bond yields over their German counterparts hitting their highest since early 2013, and ratings agency Moody’s downgrading Italy’s sovereign debt rating to just one notch above non-investment grade.

Eurozone inflation edged up to 2.2%, while core inflation increased to 1.1%. Unemployment remained at a decade-low 8.1%, however third quarter GDP growth fell below expectations to 0.2% over the three-month period. Sentiment indicators dampened to their weakest in over two years, with Italy’s composite PMI falling into contractionary territory to record 49.3; the lowest in nearly five years.

Trade tensions continued to impact the Chinese economy. Third quarter GDP growth came it an annual 6.5% which, while in line with the government’s target, reflected the worst quarterly growth in nearly ten years. Policymakers tried to quell economic concerns by reducing bank reserve requirements and introducing tax concessions.

In the UK, Brexit uncertainty continued, with the EU’s October summit passing without a resolution. The Irish land border remains a major sticking point, and despite signs of tentative agreement in mid-November, it has placed Theresa May’s tenure as Prime Minister in jeopardy. In other news, third quarter GDP growth of 0.6% was the fastest in nearly two years.

Equities markets were blighted by trade and geopolitical concerns over the month. The S&P 500 and Nasdaq Composite indices were at one point around 10% and 12% down from their start-of-month levels, and even with a late month rally had their worst month since 2012. The technology sector was the main detractor, with Google, Apple and Amazon all subject to negative news over the month. Equities volatility benefitted fixed interest markets, however, as investors flocked to safer assets. Nonetheless, widening credit spreads and increasing inflation expectations meant overseas fixed interest also had negative performance for the month; the US 10-year Treasury yield soared to 3.25%; the highest since 2011.

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