In football terms, economic performance in the second quarter of 2019 was ‘a game of two halves’. Or, rather, three thirds! April and June saw strong stock market growth, sandwiching a volatile May where political and trade issues dominated the headlines.
Here’s your full Q2 investment review looking at the major global economic and political events.
Brexit continues to dominate the UK political agenda and, after a third attempt to pass her Withdrawal Agreement failed, Theresa May resigned as leader of the Conservative Party.
With new incumbent Boris Johnson promising to leave the EU on 31 October ‘do or die’ the likelihood of a no-deal Brexit has substantially increased. Bookmakers are now offering just 13/8 on the UK leaving the European Union without a withdrawal agreement in place.
Considering that uncertainty surrounding the original deadline led to the economy contracting by 0.4% in April, policymakers are deeply concerned about the effect a disorderly Brexit could have on the UK economy.
The troubles facing the UK’s high streets also show no signs of abating. Jamie Oliver’s chain of Italian restaurants went into administration in May with the loss of 1,000 jobs, while Debenhams slipped into pre-pack administration with bosses planning 50 store closures resulting in 4,000 job losses.
Sir Philip Green’s Arcadia group narrowly avoided the same fate, while even high street darling Boots has announced proposals to close 200 stores in a cost-cutting exercise.
April also saw the end of the proposed merger between two of the UK’s most popular retailers. The Competition and Markets Authority (CMA) blocked the proposed merger between Sainsbury’s and Asda, with Stuart McIntosh, the chair of the CMA inquiry group, saying: “It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week.
“We have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers.”
As a result of the decision, Sainsbury’s share price fell to its lowest level in more than 25 years.
Despite all these negatives, UK shares performed well in Q2. The technology sector enjoyed another quarter of strong relative performance, as did several large consumer goods companies. Overall, the FTSE rose by 2%, from 7279.19 in April to a close of 7425.63 at the end of June.
Markets in the US continue to perform well, but were susceptible to wobbles caused by the unpredictable nature of Presidential policy.
This was best seen in May, as a suggestion that tariffs could be imposed on Mexican goods if the country didn’t take steps to curb migration to the US saw a sharp market sell-off. In June, when Trump ‘indefinitely suspended’ the tariffs, the markets largely recovered.
The S&P 500 reached a record high in June, and US shares continued to perform extremely strongly, growing by 3.7% in the quarter. GDP grew 3.1% in Q1, and the unemployment rate remains at a nearly 50-year low of just 3.6%.
Despite this buoyant market, consumer and business confidence indices weakened, and while the Fed left rates as they are in June the so-called ‘dot plot’ signals changes ahead. The decline in the real cost of borrowing reflected market expectations that the Federal Reserve will cut interest rates at least 50 basis points during 2019.
In line with the US market, Eurozone markets rose in Q2, despite a wobble in May linked to ongoing trade disputes. Top performing sectors included IT, consumer discretionary and industrials.
Eurozone GDP growth in Q1 was 0.4% quarter-on-quarter, while the inflation rate remained stable at 1.2%. However, the outlook remains uncertain with, for example, year-on-year orders in German factories down by 8.6%, the worst drop since 2009.
Only modest expansions are expected in Europe’s major economies, while Italian GDP is on course for a decline in the second quarter. Purchasing Managers Indices (PMI) in the service and manufacturing sectors remain at below 50, suggesting a contraction rather than an expansion.
The ongoing trade war between the US and China affected returns in the second quarter, and the MSCI Asia ex Japan index of stock markets underperformed when compared to the global equivalent MSCI World index.
The trade war escalated in May after President Trump raised tariffs on USD200 billion of Chinese imports, with China retaliating in kind. The US also blacklisted the Chinese telecommunications giant Huawei.
However, a truce was struck at the G20 in Osaka with the US holding off imposing tariffs on USD300 billion of additional Chinese imports while maintaining existing tariffs, while China will increase its commitment to reduce the trade imbalance and purchase more food and agricultural products.
Japanese shares also performed poorly in the second quarter when compared to other developed markets. The total return for the three months was -2.4%, primarily as a result of weakness in May and partly because the US campaign against Huawei is having an impact on Japanese electronic component suppliers.
The Indian general election saw a strong win for incumbent Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP), and Modi’s large majority briefly sent Indian stock markets to a record high. Indeed, after the result, the Sensex topped 40,000 for the first time in its history.
However, Modi has many problems to tackle. A leaked employment survey report suggests that India’s unemployment rate is at a record 45-year high, while a leading economist has suggested that India’s gross domestic product (GDP) is currently being overstated by about 2.5% annually.