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January 6, 2020 in Uncategorized

Winter Outlook 2019


Expectations of a phase one trade deal between China and the US grew over the quarter, increasing optimism around riskier assets, while cooling the enormous bond market rally witnessed over the summer. A decisive Conservative victory initially gave markets confidence that Johnson could deliver a softer Brexit. However, sterling subsequently experienced its worst week of the year as Brexit concerns resurfaced. New plans suggested that Johnson would try to forge a Canada-style free trade agreement which focuses on goods and not services. These plans also set a tight deadline for talks, with a greater risk of the UK crashing out of the EU with no deal in place.

Whether subsiding geopolitical tensions will kickstart global growth remains to be seen. In the meantime, manufacturing data remains weak. Germany narrowly avoided a technical recession in Q3 but its manufacturing activity, which is heavily reliant on Chinese demand, continues to weaken – dragging the wider eurozone down with it. Industrial production remains weak in China and in the US, manufacturing languishes in contractionary mode.

Key central banks will be keenly waiting to see if economic data improves with most holding rates steady this quarter. The Bank of Japan will also be watching retail sales closely following its long-delayed tax hike. Especially since the last hike in 2014 plunged the nation into recession.

Chart on Performance Data Calculated on a Total Return Basis

A Table on Asset Class Returns


The inversion of the yield curve, where short term bonds are yielding more than long term bonds, risks setting markets into a nasty vicious circle. Falling yields indicate that a recession is coming, which stimulates greater demand for bonds as investors look for greater certainty from their investments pushing yields down further. In recent weeks we have seen five-year bonds yielding just a fraction of what cash is paying out. Given this environment it is unsurprising that globally central banks have been cutting interest rates, something that could continue for a while yet. Meanwhile equities have remained relatively static. All this signifies a uniform slump in expectations across asset classes.

The only exception to this is property, where prices have not responded to what should be a positive change in the interest rate environment. This relative if not actual improvement makes the asset class more attractive. The other increases are into cash, lower yields make cash more attractive in the short term than higher risk bond markets.

A Chart on Asset Allocation Changes Short Term

A Chart on Asset Allocation Changes Long Term


UK: The UK is due to leave the EU on 31 January. The Monetary Policy Committee (MPC) announcements, minutes and quarterly inflation report are set to be released on 30 January.

US: There will be interest rate decisions from the Federal Open Market Committee (FOMC) on 29-30 January. Minutes will be published three weeks after each decision. GDP Growth for Q4 (Advanced estimate) on 30 January.

Eurozone: Quarterly GDP flash data is set to published on 31 January. A European Central Bank Monetary policy meeting has been arranged for 23 January.

Other Data: OPEC meeting on 5 March. Taiwan election on 11 January. China GDP Growth for Q4 (Advanced estimate) is available on 24 January. Germany industrial production data for November is available on 9 January. Japan consumer confidence is available on 29 January.


UK Equity

Most Likely: Increased certainty around Brexit and a supportive budget will likely sustain UK equities for most of Q1 with smaller companies outperforming large-caps, benefiting from sterling strength. As the deadline for ratification of Johnson’s Withdrawal Bill approaches and negotiations resume, UK equities may become jittery and sterling could lose ground. The currency effect would be positive for the UK’s largecap global companies, the sentiment effect could be negative and impact relative performance versus developed market peers.

Worst Case: Renewed uncertainty around the longer-term implications of Brexit may set in earlier than expected if hard-Brexit probabilities increase. Additionally, if the budget provides more stimulus and borrowing than markets expect this would increase inflation and interest rate expectations which would be negative for UK equities.

Best Case: Positive sentiment continues through the quarter benefiting sterling and smaller companies whilst off-setting negative currency effects. Positive trade war developments and double-headed fiscal and monetary policy expansion – greater than expected tax cuts and fiscal stimulus along with a continued pause in interest rate changes – would be a positive concoction for UK equities.


Most Likely: The BoE has signalled its intention to keep interest rates on hold in the near future. The demand for cash is likely to increase as investors await more certainty on Brexit. There has been a decline in the headline consumer price index (CPI) over recent months, removing pressure from the BoE to hike rates to avoid price overheating. However, the latest core inflation reading stands at 1.7%, so returns from cash remain negative.

Worst Case: The worst-case scenario for cash savers is that inflation continues to rise with cost-push pressures at the fore. With the UK elections behind us, the attention moves towards Brexit; any signal towards a hard Brexit will likely lead to higher imported inflation, deteriorating returns on cash.

Best Case: Any progress in Brexit negotiations could well be taken by the BoE as a signal to continue tightening, especially if wage growth surprises to the upside. In such a scenario, returns to cash would improve despite staying negative. Cash could also act as a defensive holding amid Brexit and US-China trade negotiations.

Global Equity

Most LikelyThe ease in trade tensions should support European markets substantially driven by manufacturing. US economic data remains supportive although any weakening in consumer spending data could hurt performance. The market expects that the Federal Reserve will keep rates steady until inflation picks up. Although this won’t deliver a boost to share prices, it reflects their view of the economic data.

Worst Case: As Brexit takes centre stage across Europe, European stocks could be negatively impacted. European manufacturing, particularly in Germany, remains in contraction territory. This could hurt the regions performance and weaken sentiment further. If the Fed changes tack and moves towards a less accommodative stance; or the US, or China back out of the trade truce the US would suffer.

Best Case: Should positive trade developments between the US and China continue, the US market will remain supported throughout the first quarter; particularly if we see an increase of business investment as a result. The UK election result reduced risks of a no-deal Brexit at the start of the year and this should support European equity markets.

Fixed Income

Most Likely: There are no expectations for the Fed to make any interest rate changes in Q1, but the market seems to believe that the Fed has restarted quantitative easing. This is despite Powell maintaining that expanding the balance sheet was aimed at managing the level of bank reserves rather than lowering long-term rates. Our view is that expectations for easing seem excessive which leaves us wary of Treasury valuations, exposing us more to the downside. Despite the Tory election majority, Brexit is still an overhang, so exposure to UK Gilts should help to navigate choppy waters.

Worst Case: Any unexpected sign of wage growth and inflation will continue to be negative for bond markets. A pick up in economic activity, or a strong improvement in leading indicators globally could lead to higher yields and subsequently lower bond prices.

Best Case: Given expensive valuations and high expectations for easing, the upside for most bond markets is limited. The ECB’s “lower for longer” stance until inflation picks up and renewed ECB corporate bond purchases should limit volatility and be somewhat positive for European fixed income.

Emerging Market Equity

Most Likely: Emerging markets will continue to be driven by lingering US-China trade uncertainty. A lot of positive news around accommodative US monetary policy is already priced in so any disappointment on that front will expose the asset class to losses. The biggest proportion of returns in 2019 came from investors willing to pay higher prices for emerging markets stocks, but earnings will have to be strong for this to be sustainable.

Worst Case: The most notable risk to emerging markets is an increase in trade uncertainty, and the single biggest reason why many investors are not buying the asset class. Earnings disappointments or the Fed sending a strong signal contrary to market expectations of monetary easing could prove painful.

Best Case: While Fed Chairman Jerome Powell scoffed at the idea of restarting of quantitative easing, the market seems to believe otherwise. The market appears certain that more accommodative measures are to be unveiled and if the Fed meets these expectations, emerging markets could see a solid start to 2020.


Most Likely: Given the weak investment volumes seen in 2019, particularly in the UK and US, the short-term easing of political tensions around US-China trade and Brexit should help investment volumes pick up, supported by continuing central bank easing. Given the attractive yields on offer, particularly in the UK, property will likely remain an attractive investment compared to many fixed income products. However, this will be tempered by EU-UK trade deal talks starting, potentially slower growth rates in the global economy and China, and the retail market continuing to struggle.

Worst Case: The woes of the retail sector will have an adverse impact on the wider market causing yields to widen and investors to flee. If rhetoric around a potential no-deal Brexit pick up again and Trump goes ahead with more proposed tariffs this could affect confidence, and any nascent signs of inflation or potential rate hikes would hurt.

Best Case: If monetary policy remains easy – and the Fed cuts rates once more – whilst investor positivity and investment volumes pick up, then we could see strong returns in the sector. Furthermore, if retail figures surprise on the upside, particularly in the US which relies heavily on the consumer, then this could be a further boon to markets. outcome of Brexit negotiations will also help to boost UK real estate.


December 18, 2019 in Uncategorized

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October 14, 2019 in Uncategorized

Autumn Outlook 2019


Weakening global economic data triggered by heightened political uncertainty and renewed US-China trade tensions spurred central banks to continue down the dovish path this quarter. The US Federal Reserve cut rates by a quarter of a percentage point twice over three months. The Bank of England maintained rates but will look to reduce them if Brexit uncertainty continues. Finally, outgoing European Central Bank chairman Mario Draghi lowered interest rates and restarted the bond-buying scheme, all while urging key member states like Germany to open their purse strings and help combat slowing growth.

It has been a summer of political drama. In Italy, right wing nationalist leader Matteo Salvini’s gamble on an early election spectacularly backfired, leaving Prime Minister Giuseppe Conte to lead a new coalition government. Tensions in the Middle East remain high after the attack on a Saudi oil processing plant, spiking up the oil price. Over in Argentina, the peso weakened by 26 per cent against the US dollar after primary election results showed the real possibility that the government could lose power in October

Brexit uncertainty also remains high in the UK. Meanwhile, economic growth continues to be revised downwards due to anaemic business investment as companies uncertain of the short term future, prefer to hoard cash rather than investing on productivity boosting technology.

Autumn Outlook Review


Government Bonds
Index Linked Bonds
Corporate Bonds
UK Equities
Overseas Equities
Emerging Markets


Economic forecasts now make grim reading, with 2020 looking to be worse than this year, and have been getting worse with each passing quarter. Germany is teetering on the edge of recession, whereas the US has gone from asking how many rate rises there will be to how many cuts there will be. Globally, bond yields have been falling significantly – Germany can now borrow for 15 years at negative rates. Intriguingly, equity prices have also risen – normally this is because companies are expected to do better, but in some cases it can simply be that the alternatives look worse, and in the current climate it looks to be the latter.

Rising prices mean returns are down. UK equities are the asset class that has significantly lagged – they did OK in UK sterling terms, but UK sterling has also done badly. Fundamentals look better in relative terms, making them more attractive. Lower yields make bonds less attractive, particularly in the short term relative to cash. Corporate bonds have improved relative to gilts, but have deteriorated relative to UK equities.

Autumn Outlook The Actuarial View


  • UK: The Brexit deadline is on 31 October. The Monetary Policy Committee (MPC) announcements, minutes and quarterly inflation report are set to be released on 7 November.
  • US: There will be interest rate decisions from the Federal Open Market Committee (FOMC) on 29-30 October. Minutes will be published three
    weeks after each decision. GDP Growth for Q3 (advance estimate) on 30 October.
  • Eurozone: Quarterly GDP flash data is set to published on 31 October. A European Central Bank monetary policy meeting has been arranged for 24 October.
  • Other Data: Argentina general elections on 27 October. China year-on-year balance of trade data is available on 14 October. Japan’s tax hike
    comes into effect on 1 October.


UK Equity

Most Likely: A negotiated Brexit deal has become the most likely scenario given the recently approved Benn Bill. The ratified Act is Johnson’s least desirable outcome given his pledge to remove the UK from the EU by 31 October, “do or die”. Logistics aside, leaving the EU with a deal should be positive for UK equities. A strengthening currency would hamper large companies which underperform smaller ones, further aided by the BoE’s current pause on interest rate increases.

Worst Case: A no-deal Brexit remains the worst prognosis for the UK as the positive impact of a weaker UK sterling on the revenues of offshore revenue generating UK companies would likely be offset by fears of disorder and economic downturn. The likelihood of this outcome has recently decreased due to the Benn Act, which requires parliamentary approval of a no-deal outcome, for which there appears little support.

Best Case: A soft deal remains the most realistic best-case scenario as parliament’s suspension has left very little time to rally significant MP support for a second referendum or even a general election. With markets having become more jittery recently a soft deal would likely be very well received as an end to the saga.

Global Equity

Most Likely: Central banks in Europe and the US continue with their accommodative policy, supporting equity markets and insuring against slowing global growth. Trump’s trade war is likely to retain focus over the quarter and further bouts of volatility are to be expected as both sides look unlikely to give way. In Japan the consumer tax hike comes into effect in October, which could see Japanese equities, particularly consumer related sectors, under pressure.

Worst Case: The trade war takes a new turn with Trump targeting Europe, further dampening global growth. Weak manufacturing data in Europe continues, adding downward pressure to European equities. Brent crude continues to rise as uncertainty surrounding the attacks on oil facilities in Saudi Arabia adds a temporary boost to inflation, hurting consumer spending.

Best Case: The Fed’s accommodative stance provides markets with some near-term relief and sends a signal to investors that the central bank will continue to intervene if necessary. Any progress in the US/China trade talks would be positive for markets.

Emerging Market Equity

Most Likely: Emerging markets are likely to be driven by market expectations of Fed easing, the US dollar and trade uncertainty. Emerging market currency strength in September was driven by the hope of more aggressive easing. Instead, the Federal Reserve forecasted no more cuts in 2019 and 2020, which was more hawkish than markets expected. If global uncertainty persists, it is unlikely that emerging markets will see a tailwind of a weaker US dollar despite the Fed easing.

Worst Case: Trade uncertainty, unfortunately, has become the new normal, with markets up or down based on US President Donald Trump’s tweets rather than any change in fundamentals. If trade uncertainty continues, global investors will likely steer clear. If the strong US dollar persists, vulnerable economies like Brazil, Turkey and Argentina are set to suffer further.

Best Case: Countries like Taiwan are already benefiting from US-China tensions as corporates have begun shifting production away from China. Emerging market central banks have become the most dovish since 2008, with at least seven countries cutting rates this year. While this should be supportive for equities and bonds, there may be a negative impact on currencies.


Most Likely: The BoE has signalled its intention to maintain its interest rate policy for a while. Core inflation should remain within the 2 per cent – 2.5 per cent range, which means returns from cash remain negative. But demand for cash is likely to increase as investors wait for a Brexit settlement.

Worst Case: The worst-case scenario for cash savers is a no-deal Brexit, as currency weakness pushes inflation higher. As Brexit negotiations turn sour and imported inflation compounds, the BoE will be forced to cut rates to stimulate the economy. Returns from cash will further dive into negative territory.

Best Case: Any progress in Brexit negotiations could well be taken by the BoE as a signal to continue tightening, especially if wage growth surprises to the upside. In such a scenario, returns to cash would improve despite staying negative. Similar to government bonds, cash could also act as a safe-haven during bitter negotiations between the government, the UK parliament and the EU.

Fixed Income

Most Likely: Next quarter could be challenging for bond markets, as central banks are not expected to intervene in the next quarter. Bond investors might not be able to rely on interest rate sensitivity (duration) to drive returns. Central banks have resumed their bond purchases programmes, meaning that the demand for fixed income instruments has increased, driving prices higher. Credit markets should outperform government bond markets, as companies sit on healthy cash balances.

Worst Case: We have reverted to a ‘normal’ situation where any sign of wage growth and inflation is bad news for bond markets. Any sign that global economies are nowhere near recession could bring yields up, which will drag down both government and corporate bond markets. Investors would panic if central banks reverse the decisions taken recently.

Best Case: Bond markets might have already priced in negative news – as such, the upside is now limited. But political uncertainty will continue to act as a drag on bond yields, anchoring the investors’ expectations to lower levels from current ones. Companies might further delay their capital expenditure decisions and lower their debt level. Bond purchase programmes should bring prices for corporate bonds higher.


Most Likely: Central banks around the world have gone into full reversal since the end of 2018, and now all appear to not just be ‘correcting’ rates but embarking on an ‘easing’ cycle. This should be positive for global real estate investors as funds previously invested in fixed income may return to the sector looking for yield, although there is the underlying issue of slowing economic growth caused by geopolitical tensions and slowing business investment that could dampen this effect.

Worst Case: The political uncertainty in Europe could increase, especially that surrounding the Brexit deadline, causing any delays in investment to be delayed further – or worse, a no-deal scenario, causing upheaval in supply chains across the continent. In the US, any increased rhetoric around tariffs on China will be negative for economic confidence and the effects of previous tariffs could come through and hit corporate earnings growth.

Best Case: Central banks accelerate their dovish monetary policy stance further, whilst global political tensions lift and investors regain confidence for taking further risk in order to achieve a higher yield that is not currently available in fixed income markets. A clearer path on the outcome of Brexit negotiations will also help to boost UK real estate.

This document has been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit Data Sourced from FE Analytics and Bloomberg Finance LP