As Autumn sets in there is a notably cooler breeze whistling through the economy and financial markets. Current economic activity data which has been flashing amber weather warnings in manufacturing for some months has more recently lowered expectations for the larger services sector. Investors could be forgiven for expecting a perfect storm and as we move into the final weeks of 2019, it is hard not to draw a comparison with the last quarter of 2018.

This time last year we were fretting about the impact of trade tensions on global growth and this year a succession of downbeat economic data has confirmed that trade is no longer just a potential threat but a clear and present danger. It is particularly concerning that the manufacturing slowdown that could be expected as tariffs start to bite, is threatening to spill over into the more important service sector.

In 2018 stock markets around the world cracked and fell sharply until Christmas. In the UK the Footsie 100 index ended the last quarter of 2018, 10% lower than where it started. In the US, Wall Street was 14% down over the same period. Could the same happen this year?

The UK economy has continued to be weighed down by Brexit uncertainty, which at the time of writing this commentary looks set to continue for another three months at least and, as some commentators would say, perhaps forever! Weakness in the world economy, particularly in the euro area, has also added to the downbeat mood. After contracting in the second quarter of 2019, the UK economy has grown modestly in the third quarter, helped by a rebound in inventories. The Bank of England have kept interest rates on hold at 0.75% but have lowered its growth forecast for 2020 in anticipation of continued Brexit uncertainty.

Growth in the Euro area has weakened further in recent months, led by a continued deterioration in the manufacturing sector. The region’s largest economy, Germany is now in recession due to the negative impact of persistent trade related uncertainty and woes in the car industry. In response to the slowing Euro area economy, the European Central Bank acted decisively by lowering interest rates and restarting its quantitative easing program at a rate of 20 billion euros per month. The Bank has promised further stimulus if the economy continues to weaken.

The US economy has continued to gradually slow over recent months amid elevated political uncertainty and weakness in global activity. Survey data suggests the manufacturing sector is now contracting and job growth is decelerating, while services activity remains relatively robust. The Federal Reserve (Fed) have continued to cut interest rates to provide the economy with additional support.

Meanwhile in China, the economy continues to slow, albeit modestly. Growth in industrial production, fixed asset investment and retail sales have all contracted. The people’s Bank of China has responded by cutting the required reserve ratio for major banks in order to encourage lending to firms and households.

The weakness in the global economy is clearly a cause for concern but it is concentrated mainly around trade and manufacturing. At Clarion, we remain cautiously optimistic that despite the current weakness the world economy will avoid both a recession and a repeat of the stock market weakness in the final quarter of 2018.

But despite the Autumn chill, there are still plenty of treats to keep the economic fires burning:

  1. New orders placed with manufactures whilst previously falling, appear to have bottomed in recent months. Rates for 30-year mortgages are at a 10-year low and the recent introduction of 50 year and lifetime mortgages bode well for the housing sector. Petrol is cheap leaving more cash available to spend. Consumer balance sheets are strong. Hourly wages are 3.3% higher than a year ago. Productivity is increasing and perhaps most importantly consumers are ignoring talk of a recession.
  2. After a decade of quantitative easing, the world is awash with capital, yet no one wishes to spend, hence the cost of capital being near or below zero. The role of the spender of last resort will yet again fall to governments and fiscal rules will be loosened through the next stage of this economic cycle. This could be hugely supportive for economies and stock markets.
  3. Amid the noise and division of 2019, the US dollar, the world’s single most important financial measure, remains as stable as ever. On a weighted basis compared to the currencies of major developed and emerging markets, and despite occasional bouts of volatility, the dollar is now exactly where it was when President Trump was elected. The dollar has become a gauge of perceived risk and as such its recent weakening suggests there is less negativity about the world economy and financial markets.
  4. Finally, stock markets are already pricing in a recession and by most historical measures, except perhaps in the US, are still cheap.

At times of uncertainty it can be tempting for investors to change their investment portfolios in a bid to take advantage of the latest news. However, it is very difficult, almost impossible, to time these changes effectively. In practice, shifting a portfolio in response to short term events often leads to little more than an increase in trading costs and being wrong footed as news flow improves.

We at Clarion believe that Investors are better served by identifying the appropriate asset allocation to suit their objectives and risk profile and ignoring short term noise. By regularly fine tuning and switching underlying funds (fund changes are on a zero-cost basis) in the Clarion Portfolios as and when appropriate we feel we are well placed to withstand extreme shocks and the inevitable bouts of volatility in financial markets.


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