After a difficult summer for risk assets, investors returned from their holidays in a bullish mood and drove equities higher in September, leaving global equities broadly flat for the quarter. The quarter was marked by a continued slowdown in the global economic data, offset by further monetary easing from the US and Europe.
In the US, the Federal Reserve (Fed) cut interest rates in July and September in an attempt to prolong the economic expansion in the face of a slowdown in the pace of growth and hiring. While the economy continued to add jobs, the pace of growth of aggregate hours worked in the economy has slowed meaningfully. Consumer confidence also declined from elevated levels. US equities delivered 1.7% over the quarter in USD.
Exhibit 1: Asset class and style returns in local currency
Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT All REITs; Cmdty: Bloomberg UBS Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in local currency. Past performance is not a reliable indicator of current and future results. Data as of 30 September 2019.
In Europe, the European Central Bank (ECB) responded to the weaker economic outlook by cutting interest rates further into negative territory, restarting quantitative easing and committing to continue with asset purchases until it achieves its inflation target. This shift from a date- dependent to a state-dependent form of forward guidance is significant in that it could lead to a large expansion in the total size of assets purchased by the central bank over the coming years. While those asset purchases may have a limited effect on their own, if combined with fiscal stimulus from the economies that can afford it, they could help to support growth. But the timing of any fiscal stimulus from Europe remains uncertain.
The ECB’s policy easing came against a backdrop of weakening growth, with the business surveys for September painting a picture of an economy that continues to slow, particularly in the manufacturing sector. With growth pushing in one direction and monetary stimulus pushing in the other, European equities delivered 2.5% over the quarter.
In the UK, the seemingly never-ending Brexit saga dragged on, with parliament passing legislation that will force the government to ask for an extension if it can’t agree a deal with the EU. This sent sterling higher, before the prime minister suspended parliament, only for the suspension to be ruled unlawful. So, no let-up in the drama, with a highly unpredictable election remaining the most likely outcome if a deal cannot be reached in the coming weeks. UK equities delivered 1.0% over the quarter.
Exhibit 2: World stock market returns in local currency
Source: FactSet, FTSE, MSCI, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency. Past performance is not a reliable indicator of current and future results. Data as of 30 September 2019.
The Bank of England remained on hold as Brexit uncertainty continued to cloud the outlook for the UK economy. With wage growth at 4%, policymakers are conscious that if global and Brexit- related risks subside they may still need to raise rates, whereas if the downside risks highlighted by some of the business surveys materialise they will need to follow the Fed and lower rates. UK government bonds delivered 6.7% over the quarter.
In Japan, the consumption tax hike has just come into place, posing a risk to an economy that is already feeling the effects of the global slowdown in manufacturing. Faced with these risks, Japanese consumer confidence continued to decline this quarter. The Bank of Japan also resisted the temptation to join in the easing game, but said it would review the outlook at its next meeting, perhaps hinting at further easing to come. Japanese equities delivered 3.4% over the quarter.
Of course, the trade war also continued to play a prominent role in financial headlines throughout the quarter. As things currently stand, further tariffs are due to come into place by the end of the year unless renewed talks between the US and China make sufficient progress. Failure to prevent further tariffs could hurt the global economy, so it’s set to be another quarter of carefully monitoring the developments on trade.
China’s economy continued to slow, with industrial production growing at 4.4%, down from around 7% at the start of 2018. Retail sales also slowed, to 7.5% from close to 10% in early 2018. However, with growth still comfortably above that in the US, and given that the US economy is also slowing as a result of the trade dispute and there is a US election next year, it’s far from clear that China will concede to US demands on trade. EM equities delivered -1.9% over the quarter.
Exhibit 3: Fixed income government bond returns in local currency
Source: FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. All indices are J.P. Morgan GBIs (Government Bond Indices). All indices are total return in local currency. Past performance is not a reliable indicator of current and future results. Data as of 30 September 2019.
Helped by central bank easing and rising concerns about the global growth outlook, it was another good quarter for government bonds, albeit with a temporary sell-off in early September. US Treasuries delivered over 2% in the third quarter. Global IG credit delivered 1.2%, while US high yield returned 1.3% and Euro high yield returned 0.9%.
Exhibit 4: Fixed income sector returns in local currency
Source: Barclays, BofA/Merrill Lynch, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. IL: Barclays Global Inflation-Linked; Euro Treas: Barclays Euro Aggregate Government - Treasury; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBIG. All indices are total return in local currency. Past performance is not a reliable indicator of current and future results. Data as of 30 September 2019.
Overall, the global economy faces several binary and highly unpredictable risks. Will the trade war escalate? Will a UK election lead to a no-deal Brexit? Will the recent tension in the Middle East escalate and cause another spike in the oil price? And will companies respond to slowing growth and profits by cutting jobs?
Until we have more clarity on the answers to these questions, we continue to believe that it makes sense to avoid overweight positions in equities and credit and to move up in quality within both. Within equities, large cap, quality, value stocks are likely to prove most resilient if the downside risks materialise. Within alternatives, investors may find diversification through investments in infrastructure, global macro strategies and gold. US Treasuries should also provide a hedge if growth rolls over.
Exhibit 5: Index returns for September 2019 (%)
Source: MSCI, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Data as of 30 September 2019.