April 2019 Investment & Economic Update
In our latest monthly investment update for April 2019, we look at how the investment markets, the global economy and commodity prices are performing.
The FTSE 100 index of leading UK company shares experienced another positive month in March, finishing the month at 7,279.19 points. This represented a 204.46 point or 2.89% rise during the month, despite continued Brexit uncertainty.
Global equities reached a five-month high during March, despite technical indicators suggesting a looming recession.
At the start of trading in April, UK stock markets joined a global market rally, prompted by strong Chinese factory data and hopes for a resolution over US/China trade disputes.
China’s manufacturing sector returned to growth in March, helped along by government efforts to stimulate the economy. The latest Caixin/Markit survey rose to an 8-month high of 50.8 in March, up from 49.9 in February.
Strong UK manufacturing data also showed an unexpected 13-month high in March, with firms stockpiling goods ahead of Brexit.
The latest IHS Markit/CIPS Purchasing Managers’ Index (PMI) for the manufacturing sector showed a reading of 55.1 in March. This was up from 52.1 in February, with an index reading above 50 indicating expansion.
It means the PMI has now been recorded above 50 for 32 consecutive months. Rob Dobson, Director at IHS Markit, warned however that the boost to the UK economy from manufacturers could prove to be temporary.
Dobson said: “Manufacturers are already reporting concerns that future trends could be constrained as inventory positions across the economy are unwound.
“The survey is also picking up signs that EU companies are switching away from sourcing inputs from UK firms as Brexit approaches.
“It looks as if the impact of Brexit preparations, and any missed opportunities and investments during this sustained period of uncertainty, will reverberate through the manufacturing sector for some time to come.”
The improved picture for manufacturers in the UK and China was not however reflected by those in the Eurozone, with Germany leading the sector lower. German manufacturers slipped further into contraction in March, with output falling to a seven-year low.
According to the Eurozone PMI, the region recorded an index reading of 47.5 in March, down from 49.3 in February. German PMI fell to 44.1, its lowest index reading since July 2012.
Chris Williamson, chief business economist at IHS Markit said:
“Concerns over trade wars, tariffs, rising political uncertainty, Brexit and – perhaps most importantly – deteriorating forecasts for the economic environment both at home and in export markets, were widely reported to have dampened business activity and confidence.”
Despite a mixed picture for industrial output in different parts of the world, and continued Brexit uncertainty in the UK, investor confidence appears to be holding up well.
The latest State Street Global Investor Confidence Index rose to 71.3 in March, up 0.4 points from a month earlier. Confidence among North American investors reported a small improvement, with a fall in confidence for European investors and a rise for Asian investors.
Kenneth Froot, the creator of ICI, said: “Investors continue to face mounting political risks, including the potential for a hard Brexit, a breakdown in US-China trade talks, and the potential for populist wins during the European Parliament elections in May. The heightened uncertainty appears to be driving North American and European investors away from risk.”
This generally improved investor confidence appeared against a backdrop of technical indicators suggesting the next global recession is closer. This fear was triggered by the appearance of an ‘inverted yield curve’ in the US.
An inverted yield curve describes a situation where the spread between the yield on short-term and long-term US Treasuries inverts, with long-term interest rates falling below those for short-term debt. It indicates the markets believe interest rates will be cut, which almost always happens due to an economic recession.
Every recession since the end of World War Two has been preceded by an inverted yield curve, but not every inverted yield curve precedes a recession, leading to some suggestions that it could be a false alarm on this occasion.
Even if this inverted yield curve does lead to a recession, the markets suggest it is at least another year away. Periods of an economic downturn are not necessarily bad news for investors, with equity markets and economies not perfectly correlated.
Economic growth in the US is continuing to slow, with official figures showing it slowed to an annual rate of 2.2% in the final quarter of last year. Economists believe US growth has slowed even further in the first quarter of 2019, due to reduced government stimulus and trade tensions with China.
The US Commerce Department revised its economic growth forecast for 2019 down last month, reflecting weakness in consumer spending, business investment, government spending, and the UK housing market.
UK price inflation rose very slightly in March, with the Consumer Prices Index (CPI) measure reaching 1.9% for the year. It was up from 1.8% in February and remains below the Bank of England’s 2% inflation target. A Reuters poll of economists had forecast an unchanged rate of inflation.
With many household utility bills set to rise in April, price inflation is expected to rise above the 2% target for a time, although continued Brexit uncertainty means the Bank’s Monetary Policy Committee is unlikely to take action on interest rates in the near-term.
Price inflation across the Eurozone fell slightly in March, to 1.4% for the year, down from 1.5% a month earlier. Core inflation slowed to 0.8%, although much of this fall is expected to reverse next month due to the timing of Easter this year.
Average house prices fell in England in the first quarter for the first time in seven years. London and the South East both reported falling prices, with overall average prices falling 0.7% in the first three months of the year, according to the latest Nationwide survey.
The London property market was the most significant contributor to falling prices, reporting an annual fall of 3.8% in the three months to March. It represents the seventh consecutive quarter of falling house prices in London.
According to Nationwide, a combination of Brexit uncertainty and the impact of the weaker London housing market are having a ripple effect throughout the South East, with average prices there down 1.% in the first quarter, compared to the same period in 2018.
Robert Gardner, Nationwide’s chief economist, said:
“Policy changes that have impacted the buy-to-let market in recent years are also likely to have exerted more of a drag in London, given that the private rental sector accounts for a larger proportion of the housing stock in the capital than elsewhere in the country.”
Global oil prices experienced their largest first-quarter gains in nearly a decade, with tighter supply and a sustained global economy supporting prices. The benchmark Brent Crude for June delivery was at $68.54 a barrel at the start of the month, rising by 27% in the first quarter.
The benchmark 10-year government bond (gilt) is yielding 1.01% at the start of April, falling during March as investors move to safety ahead of an outcome for Brexit.
£1 currently buys $1.3089 or €1.1655. The Forex Gold Index is $1,295.40/oz, and the Silver Index is $15.09/oz.