Global stock markets recovered smartly in June as US-China trade tensions eased and central bank policies moved further into expansive territory.
Gains of roughly 4% for UK equities are a good showing but, with global equity returns of over 6%, political risks are likely to have weighed down domestic sentiment.*
Meanwhile, economic data remains unconvincing and has yet to confirm a stabilisation in slowing global growth. Examples of this include further declines in performance from the manufacturing sector, a slower pace of job creation, and falling levels of inflation.
This decline in inflation might reveal an absence of pricing power from businesses reflecting an excess supply, or alternatively an absence of sufficient customer demand. Neither tell a good story for the economy.
Falling levels of inflation also reflect a weaker oil price. Oil’s high levels of unpredictability and volatility means its price has a significant impact on consumer and business outlays. Conversely, a lower price can be a very useful stimulus.
This environment has made central banks’ decision-making on policy marginally easier. With growth and inflation both under pressure, the need for more restrictive monetary policy has been removed.
The European Central Bank has confirmed cheap lending facilities will be made available to commercial banks from September. Loans will be extended on the basis the funds find their way into the broader economy.
The Federal Reserve’s guidance has shifted from a calling for three to four hikes in 2019 as recently as September 2018, to one to two cuts as of today.
If we look East, Chinese data remains opaque but there is further evidence the leadership are ramping up for more stimulus efforts. These could take several forms, including interest rate cuts, tax cuts, increased spending, and higher levels of domestic credit issuance.
This evidence suggests policy makers are taking great strides to prevent a continuation of the current slowdown.
Looking at the UK, no matter the ideology or charm of a new Prime Minister, intentions to change the previously tabled Withdrawal Agreement with the EU might prove too ambitious, just as delivering a ‘no deal’ Brexit may be impossible given parliamentary preferences.
Such complications raise the prospect of a general election which, itself, has a myriad of potential outcomes. Such uncertainty has done little to engender confidence from the investment community in the attraction of undervalued UK share prices. This could well be a feature that persists until a final destination becomes clear, whenever that may be.
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