Market Analysis Sep 2019

Despite ongoing global uncertainties and a perceived economic slowdown, US equities managed to achieve modest gains during Q3. The financials, utilities, and energy sectors performed well, whereas the healthcare sector lagged due to political sensitivity concerns in an election year. The Federal Reserve executed two rate cuts during the period, aiming to bolster the economy. However, the messaging surrounding these moves left investors somewhat uneasy. Additionally, the inversion of the US yield curve, often associated with an impending recession, contributed to market unease. Amidst these uncertainties, speculation about potential impeachment proceedings against President Trump added to the market's complexity.

US economic data displayed stability but continued moderation, exemplified by lower-than-expected non-farm job additions in August and a dip in consumer confidence during the same month. Defensive sectors, including utilities, real estate, and consumer staples, outperformed, while energy and materials sectors suffered due to expectations of subdued demand. Healthcare, amidst debates surrounding the upcoming presidential election, underperformed due to perceived political risks.

Despite ongoing trade tensions and global growth concerns, Eurozone equities recorded gains during Q3. Utilities, real estate, and consumer staples sectors outperformed, while energy and consumer discretionary sectors faced challenges. September saw a market shift, with financials leading the gains after a period of underperformance earlier in the year.

Economic data within the Eurozone remained lackluster, with meager Q2 expansion of 0.2% and a decline in annual inflation from 2.1% to 1.0% in August. Speculation over further central bank stimulus took center stage, leading to the European Central Bank's (ECB) announcement of measures to invigorate the economy, including the restart of quantitative easing and a commitment to asset purchases until inflation targets are met. Moreover, Christine Lagarde's nomination to replace Mario Draghi as the ECB president signaled upcoming changes in leadership.

Italian politics remained a point of interest, as the breakup of the right-wing League and populist Five Star coalition led to the formation of a new coalition between Five Star and the Democratic Party, potentially impacting fiscal policies. Spain also faced its fourth general election in four years, adding to political volatility.

Amidst a diverse quarter for global stocks, UK equities achieved moderate gains. Defensive assets, such as quality growth stocks with stable earnings growth, performed well, supported by merger and acquisition activities and private equity interest. On the other hand, economically sensitive areas like financials and commodities faced challenges, impacting the FTSE 100's performance compared to mid-caps (FTSE 250 ex investment companies) which posted a stronger return.

Anticipations shifted towards fiscal measures to stimulate economic activity and inflation, leading to the reversal of some trends as the quarter progressed. The UK economy experienced a loss of momentum, with Q2 GDP growth confirming a contraction of -0.2%. Amidst ongoing Brexit and political uncertainties, Prime Minister Boris Johnson's pledge to achieve Brexit by October 31st remained a central concern. Legal developments increased hopes that a "no deal" exit could be avoided.

The Japanese market rebounded in Q3, generating a total return of 3.4%, recovering from early August weakness. The yen remained relatively stable, and positive trade negotiations between the US and Japan contributed to this positive trend. Policy continuity after the Upper House elections provided stability, removing uncertainties surrounding the consumption tax increase.

However, the broader Asia ex Japan equities experienced challenges, declining by 4.5% due to escalated US-China trade tensions and global growth worries. Hong Kong SAR faced ongoing demonstrations, while Malaysia, Singapore, and Thailand also recorded negative returns. China and South Korea experienced smaller underperformance, with China announcing domestic policy support and South Korea facing a trade dispute with Japan. Taiwan, driven by strong tech sector performance, posted a positive return.

During Q3, government bond yields decreased substantially due to increased risk aversion in August. The US-China trade tensions escalated, leading to higher tariffs and a devalued renminbi. However, improved sentiment in September followed announcements of resumed US-China trade talks. Nevertheless, geopolitical tensions remained elevated, as impeachment proceedings were initiated against President Trump.

The ECB's new stimulus measures and the Fed's rate cut in September influenced sentiment. While US services and labor markets remained resilient, manufacturing faced challenges. In the Eurozone, leading indicators signaled worsened conditions, especially in manufacturing.

The 10-year US Treasury yield fell over 30 basis points to finish the quarter at 1.67%, briefly dropping below the two-year yield, a sign of economic pessimism. European yields also declined, with the 10-year Bund yield finishing at -0.57%. Italy's yield fell 126bps to 0.82% due to stimulus measures and political stability. In the UK, Brexit uncertainties contributed to a 34bps drop in the 10-year yield.

Corporate bonds outperformed government bonds, buoyed by falling global yields and improved risk sentiment. Investment-grade corporate bonds fared better than high-yield bonds, with telecoms and utility sectors performing well. Emerging market bonds produced positive returns, while emerging market currencies weakened against the US dollar.

Convertible bonds offered stability during the volatile quarter, showing less drawdowns and volatility compared to equities. European convertibles became slightly more expensive.