Review of the week: The unconquerable bull

Global equities shrugged off some bad news to post remarkable gains in the first quarter. Julian Chillingworth, our chief investment officer, thinks it’s time to shuffle toward the exit – but not too fast.

The unconquerable bull

As fear bounced around the world and an omen of coming recession appeared in the bond market, global equities soared.

The MSCI World Index, a basket of advanced economy stock markets, rose almost 12% in the first three months of 2019, the best quarter since 2010. It helps that equities were coming off a lower base – most major stock markets are still below where they were six months ago. But such an aggressive upward move is quite extraordinary, given how much fear still stalks markets. The yield of 10-year German government debt has slipped back into negative territory as investors lock in a loss because they worry other assets could lead to greater pain. Bunds haven’t had negative yields since 2016. UK 10-year bonds have fallen to 1.00%, a level that hasn’t been tested since 2017.

Economic growth has slowed noticeably and continues to decelerate. We expected this slowdown, as much of the faster expansion of 2017/2018 was driven by sugar-rush US tax cuts. For now, we expect GDP growth to moderate and tick along for the rest of the year. Recession does not seem likely to us, despite the “inversion” of the US Treasury yield curve (where the one-year Treasury bond yield moves above the 10-year bond yield).

As we have mentioned before, an inverted yield curve is an authoritative harbinger of recession. It has inverted in anticipation of all of the last nine recessions, while sending just two false signals. However, investors must be careful. The length of time between inversion and recession is very inconsistent. And it is always long. Since the mid-1950s the yield curve has inverted on average 14 months before a recession, and that lag has been getting larger over time. In contrast, equity markets peaked just four months before recession. Selling equities as soon as the curve inverts could mean missing out on rising equity markets for a rather long time. Since 1980, US equities have averaged 12% in the first 12 months after inversion.

So as markets wax mightily in early 2019, we believe now’s the time to look carefully at your investments. We have counselled our managers to move out of riskier stocks tied to economic expansion and buy more “defensive” companies instead. These defensive businesses tend to offer less growth, but their profits are more dependable and therefore give more protection when economies hit a rough patch. If a recession does arrive, virtually no part of the equity market will be spared losses. But defensive companies typically fare better in the lead-up to a downturn, and yield fewer losses during it.

Essentially, we’re probably entering the final chapter of the longest upward run for stock markets, but it seems likely to be many, many pages long. For all worries about the US Federal Reserve’s sudden halt in tightening its monetary policy, do remember that the Fed has stopped. Similarly, China’s Caixin survey of small privately owned manufacturers rebounded last week. The March release showed output jumped to its highest level in eight months, putting it back in expansionary territory. And the trade dispute with the US is still yet to be resolved. Any progress there should boost both investors’ moods and Chinese factories.


Source: FE Analytics, data sterling total return to 29 March

Displacement activity

Like a dog chasing its tail, Parliament continues to go round in circles chasing an agreement on Brexit.

Last week, a series of indicative votes produced no clear winner (or any winner, to be completely fair). Meanwhile, Prime Minister Theresa May is reportedly planning a fourth attempt to pass her compromised Brexit deal. Mrs May’s prior rejections in the House of Commons were by margins so humiliating just one of them would have led to resignation in the good ol’ days. Now, it’s just another day.

More indicative votes on the options are due this week; the Speaker, John Bercow, is expected to start narrowing the options as they lose favour, helping focus the minds of MPs. He needs to – an agreement is needed by 11 April to ensure that the UK won’t crash out without a plan the following day. The Prime Minister’s advisers are apparently threatening recalcitrant MPs that the nuclear option of a general election is on the table if they don’t support the government. All of this does make you ponder the essence of UK democracy. What is the government? Is it the Prime Minister? Is it her revolving door Cabinet that has tallied 28 resignations in the coalition government’s 32 months at the helm? Is it the Conservative Party as whole? Or the backbench 1922 Committee – perhaps the European Research Group?

By convention, function and law, the government is answerable to the House of Commons. The current government finds this a burden. It’s likely that many UK voters feel the same way. Does the UK parliamentary system need reform? Does the current system speak for the people as best it can? The system is so old and retrofitted, you have to wonder whether that was ever its explicit aim. Or is the UK’s ancient, evolved system doing what it’s supposed to do? To ensure that the best decision is made for the best reasons; that the tyranny of the majority and knee-jerk decisions aren’t allowed to dominate. Your answer is probably determined by how you feel about the issue at hand. Perhaps replace Brexit with Labour’s nationalisation policy and answer again.

Whatever the outcome of Brexit, or the general election if we have one, it seems vital that the UK takes a hard look at its political system and how it’s managed. Hundreds of years ago, brother fought brother to assert the sovereignty of Parliament. Just more than a century ago, men without property lived through the horrors of the Western Front without the ability to vote. Women campaigned and struggled and suffered to win unqualified suffrage a decade later. Now, most people see politics as a carnival, filled with clowns and crooks. Many voters typically can’t be bothered to use their vote. Is it laziness, apathy or disillusionment? Arguably, this popular disillusionment and a slide toward populist fixes are a global phenomenon. Yet the UK will have to find the answer to its own problems if it wants to improve the state of its own discourse.

Talk to people in the street and there will be no end of problems they see with the nation, yet electoral turnout in the UK has shifted significantly lower in the 21st century compared with the 20th. We should ponder why the one exception to that rule was a non-binding vote over our membership of the EU. And how so many Britons can be unaware that UK referenda are always only advisory in nature: because Parliament is sovereign, not the people. Because this isn’t America and that’s not how our democracy developed.

If people don’t know how their democracy works, can it truly be called a democracy?


UK 10-Year yield @ 1.00%

US 10-Year yield @ 2.41%

Germany 10-Year yield @ -0.07%

Italy 10-Year yield @ 2.49%

Spain 10-Year yield @ 1.09%


Economic data and companies reporting for week commencing 1 April

Monday 1 April

US: Retail Sales, ISM Manufacturing, Construction Spending, Business Inventories

EU: Manufacturing PMI, Unemployment Rate, CPI; FRA: Manufacturing PMI; GER: Manufacturing PMI; ITA: Manufacturing PMI              

Interim results: AXA Property Trust

Tuesday 2 April

UK: BRC Shop Price Index

US: Wards Total Vehicle Sales, Durable Goods Orders,

EU: PPI               

Final results: Next Fifteen Communications, Nucleus Financial Group, TP Group

Interim results: James Halstead, YouGov

Wednesday 3 April

UK: Services PMI, Official Reserves

US: ADP Employment Change, MBA Mortgage Applications, Services PMI

EU: Retail Sales, Services PMI; FRA: Services PMI; GER: Services PMI; ITA: Services PMI               

Final results: AA, JTC, Urban Exposure

Interim results: Gattaca

Trading update: CMC Markets, Topps Tiles

Thursday 4 April

US: Initial Jobless Claims, Challenger Job Cuts

EU: ECB March Meeting Minutes; GER: Factory Orders, Construction PMI           

Final results: Hunters Property Saga, Smart Metering Systems

Trading update: Pershing Square Holdings

Friday 5 April

UK: Halifax House Prices, Unit Labour Costs

US: Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, Consumer Credit

Trading update: GVC Group


Total votes: 89

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