This month: The year of the “fade trade”? Markets unsettled by UK macro-political risk. Growth concerns augur subdued second half. Diversification becomes ever-more urgent. Non-sterling […]
This month, our wealth management experts assess Germany’s economic prospects along with the mixed messages being sent out by bond and equity markets. They also identify attractive opportunities events like Brexit are throwing up.
Stabilised oil prices set the stage for a German economic comeback
Bond and equity markets present very different signals to decipher
Central bank policy moves to remain central to the investment landscape
Prospect of a benign Brexit could boost mid and small cap UK equities
If German real GDP contracts in the third quarter, many will point the finger at trade and the auto industry for being responsible. There has been a spate of weak data reported by German factories recently. In August, manufacturing production fell 4.1% from a year earlier and forward-looking manufacturing orders were down 6.6%, suggesting factory output could potentially fall further from here.
Looking a little deeper at the data, the downturn seen in new car production (a key industry in the manufacturing sector) appears to have troughed in July and has steadily picked-up over the last few months. The data indicates that auto output recovered in the third quarter and the sector may not necessarily be the root cause of slowing economic growth.
Looking a little deeper at the data, the downturn seen in new car production (a key industry in the manufacturing sector) appears to have troughed in July and has steadily picked-up over the last few months
The recent increase in the crude oil price is more likely to be the main factor in the downturn. Germany has the second highest volume of road traffic per unit of GDP in the world, behind the US, and has high energy needs to serve that volume of transport. There is little domestic crude oil production so the nation is highly dependent on energy imports. As the value of oil imports increase, Germany’s trade surplus narrows and detracts from GDP growth. This probably explains the fairly tight relationship between GDP growth and changes in the crude oil prices.
The good news is that the major impact of the crude oil price is short term. As the Brent crude oil prices has stabilised below $60 a barrel, down from a peak of $74 a barrel half a year ago, the drag on German real GDP from energy prices should ease going forward. Look for the German economy to stage a recovery over the coming quarters.
Chief Investment Strategist at Smith & Williamson Investment Management
The bond and the equity markets are sending very different signals right now. Bonds reflect abject misery; a world of low growth, low inflation and meagre investment returns. Equities, conversely, are full of the joys of life; with the US market recently clocking up a fresh high. Each has their own reasons for being as they are, but for us the reality lies somewhere in the middle and we’ve used the recent share price exuberance to do some tactical rebalancing.
Bonds are a bit less negative than they were in late August, but they are negative nonetheless, with a whopping $13trn of the market now trading with a negative yield. This is a retracement from the negative $17trn they boasted at the height (or depth rather!) of the summer, but still portrays a pretty dismal view.
Equities on the other hand have roared higher, with markets up between 10 and 25% this year. The US has led the way and has reached new highs. If this reflected resurgent earnings or uber cheap valuations, then we’d be more inclined to wade in, but the sad facts are it doesn’t
Equities on the other hand have roared higher, with markets up between 10 and 25% this year. The US has led the way and has reached new highs. If this reflected resurgent earnings or uber cheap valuations, then we’d be more inclined to wade in, but the sad facts are it doesn’t. Earnings in the third quarter have followed the same pattern as they have for much of this year: contractionary, but not to the extent that analysts expected. In the current season, only Japan can boast growth.
The price rise in stocks has been fantastic and having rotated into them in August we’ve now looked to trim and book gains. Markets have a tendency to over-react and booking profits to us makes good sense.
Head of Investment Strategy at Psigma Investment Management
Former Bank of England Governor Mervyn King famously remarked that “a successful central bank should be boring”. Incoming European Central Bank President Christine Lagarde inherits anything but.
The ECB exemplifies the extraordinarily loose monetary policy central banks have been forced into since the crisis, but there are loud dissenting voices.
The ECB, modelled on the Bundesbank, has traditionally been guided by a mantra of price stability and there is a strong reluctance by some leading EU members to move into a broader remit. In particular, there is genuine disconcertment about the use of experimental monetary policy, namely negative interest rates and continuous quantitative easing.
Economic growth is slowing in the eurozone (possibly even towards recession), meaning that Lagarde will remain under pressure to “do whatever it takes” to prop it up, to quote outgoing President Mario Draghi’s famous words
On negative interest rates, the concerns are centred around the potential damage to the financial sector if is maintained for an extended period.
On quantitative easing, concerns centre on the perceived “financing of government spending” by asset purchases – and the intent to protect heavily indebted governments from a rise in interest rates.
However, economic growth is slowing in the eurozone (possibly even towards recession), meaning that Lagarde will remain under pressure to “do whatever it takes” to prop it up, to quote outgoing President Mario Draghi’s famous words.
Further monetary accommodation is expected in Europe and investors need to keep a keen eye on the implications of unusual – and even unprecedented – central bank moves in the months to come.
Fixed Income and Macro Strategist at Brown Shipley
Even though they’re crawling higher, equity markets are riddled with fear right now, with a number of risks that worry them. The US trade war with China; clear evidence of slowing global economic growth; worries over Brexit; Europe’s industrial companies in recession; growth in the Far East declining; and even the employment market in the US showing signs of fatigue.
With ultra-low returns likely from bonds and the yield on the 10-year German Bund falling to a negative 0.4%, there isn‘t much value in fixed-interest. But equities still seem attractive.
Although the uncertainties around Brexit are huge, we think the risk of the Brexit process producing a market-friendly outcome (where sterling rises in value and investors flock back to UK shares) is at least equally balanced with the threat of a “bad” Brexit. UK shares are cheap compared with international peers. Once uncertainty over our future relationship with the EU lifts, international investors might look for bargains in our market. Already there has been a steady stream of overseas companies buying up UK competitors on the cheap.
Once uncertainty over our future relationship with the EU lifts, international investors might look for bargains in our market. Already there has been a steady stream of overseas companies buying up UK competitors on the cheap
It’s too early for investors to put all their eggs in the UK’s basket, as there still remains the risk of a negative outcome for British markets. But there is also the chance that that something more benign occurs. So, investors would be wise not to bet against the UK and domestically exposed mid and small cap UK equities might be worth a look.
The cycle is well advanced – in the US, there has never been a longer economic expansion. But interest rates are low, signs of corporate and financial stress are scant and valuations in many equity markets across the world are reasonable. It could be a lot worse.
Deputy Chief Investment Officer, Canaccord Genuity Wealth Management
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