February 2019 Investment & Economic Update
In our latest monthly investment update for February 2019, we look at how the investment markets, global economy and commodity prices are performing.
The FTSE 100 index of leading UK company shares made steady gains during January, finishing for the month at 6,968.15 points, up from 6,728.13 points at the end of December.
This represents an increase of 240.02 points or 3.57% during the month.
Markets have seen a strong start to the year, coming off the back of a turbulent period at the end of 2018. The recovery has been led by the US with the S&P 500 returning close to levels last seen at the beginning of 2018.
The gains are owed in part with a change in tone from the US Federal Reserve who hiked interest rates four times last year and signalled further rises would come in 2019.
However, 2019 began with repeated public assurances from Fed officials that they were sensitive to concerns about the economy and would be patient and flexible as they decided whether to raise interest rates.
The International Monetary Fund (IMF) released its World Economic Outlook which left its UK economic growth forecast for 2019 unchanged at 1.5%, but said there was “substantial uncertainty” around this prediction.
The report stated that a range of triggers pose further risks to the economy and, “These potential triggers include a no-deal withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China.”
The Office for National (ONS) released price inflation data that saw a further decrease in the Consumer Prices Index (CPI) from 2.3% in November to 2.1% in December, the lowest figure in almost two years.
Mike Hardie, head of inflation at the ONS, said: “Inflation eased mainly due to a big fall in petrol, with oil prices tumbling in recent months. Air fares also helped push down the rate, with seasonal prices rising less than they did last year. These were partially offset by small rises in hotel prices and mobile phone charges.”
Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) saw a decrease in the rate of expansion during January. The rate decreased from 54.2 in December to a three month low of 52.8 in January, the second lowest since July 2016.
An index reading above 50 indicates expansion.
The manufacturing sector made a lacklustre start to 2019, as trends in output and new orders slowed and employment fell for only the second time in the past two-and-a-half years.
With January also seeing a marked slowdown in the rate of expansion in new order inflows, companies reporting an increase in output mainly linked this to stock-building activity as part of Brexit preparations.
Rob Dobson, Director at IHS Markit, said: “Despite the temporary boost provided by clients’ pre-purchases and efforts to build-up stocks, the underlying trends in output and new orders remained lacklustre at best.
“Based on its historical relationship against official data, the January survey is consistent with a further solid contraction of production volumes, meaning manufacturing will likely act as a drag on the economy in the first quarter.”
In Europe, Italy has fallen back into recession, intensifying the concern over the countries debt levels and the wider Eurozone economy.
The Italian economy, the third-largest in the Eurozone, contracted by a quarterly rate of 0.2% in the fourth quarter of 2018. Following a 0.1% decline in the third quarter of 2018 that means Italy is in a technical recession, defined as two consecutive quarters of economic contraction, just four years after its last recession.
The Eurozone economy grew by just 0.2% in the fourth quarter of 2018, the same as in the third quarter, according to provisional figures released by the Eurostat statistics agency.
The Eurozone grew by 1.8% in 2018 overall, its poorest performance in four years and lower than was anticipated at the start of 2018, when the bloc was expected to slow only slightly from 2017’s strong growth of 2.4%.
Meanwhile in the US, according to a report released by the Congressional Budget Office (CBO), the partial shutdown of the Government, which lasted 35 days, cut into the country’s economic growth.
Gross Domestic Product (GDP) for the US will be about 0.2% lower for the fourth quarter of 2018 and 0.4% lower during the first quarter of 2019 than it would have been.
The CBO has calculated that the shutdown has cost the US economy $11 billion in total. While part of that will be recouped later in the year, the CBO says that there will be a permanent loss of $3bn.
The CBO reports highlights those who bore the brunt of the shutdown, stating: “Among those who experienced the largest and most direct negative effects are federal workers who faced delayed compensation and private-sector entities that lost business…Some of those private-sector entities will never recoup that lost income.”
Turning now to the global investment markets, the latest edition of the CFA UK Quarterly Valuations Index found that investor perception of government and corporate bond valuations has become more favourable.
Of those surveyed, 61% viewed government bonds as overvalued in the fourth quarter of 2018, a decline from 67% in the previous quarter.
The outlook for corporate bonds was not as positive, although there was also a decline in those surveyed who viewed corporate bonds as overvalued from 76% in third quarter of 2018 to 69% in the fourth quarter.
Bonds have historically been viewed as a safe haven in times of volatility in the equity markets and, according to CFA UK, the survey results indicate a ‘risk-off’ mentality for investors during a period of investment market uncertainty.
Despite the recent volatility in equity markets, the survey revealed that a slight improvement in investor’s views on global equities. The view that developed market equities are overvalued saw a decline from 65% to 61% over the two quarter period.
The outlook was better still for emerging markets equities with more than half of investors surveyed stating emerging market equities are either “very undervalued” or “somewhat undervalued”, with an additional 22% of investors claiming fair value in the emerging market equities asset class.
House prices in the UK grew at the slowest annual rate for nearly six years in January, according to mortgage lender Nationwide.
Year-on-year prices increased by just 0.1% in January, down from a rate of 0.5% in December with the average property price in the UK now at £211,966.
The Nationwide said it was likely that the recent slowdown in the market was due to “the impact of the uncertain economic outlook on buyer sentiment”.
A survey of Royal Institution of Chartered Surveyors (RICS) members found that a net balance of 28% expect property sales to fall in the next three months. It is the most downbeat reading since records started in October 1998 and the pessimism is blamed on the lack of clarity around Brexit.
Robert Gardner, Nationwide Building Society’s chief economist, remains positive commentating that: “if the economy continues to grow at a modest pace, with the unemployment rate and borrowing costs remaining close to current levels, we would expect UK house prices to rise at a low single-digit pace in 2019.”
The benchmark 10 year government bond (gilt) is yielding 1.23% at the start of the month.
£1 currently buys $1.3103 or €1.1443. The Forex Gold Index is $1,323.25/oz and the Silver Index is $16.13/oz. Brent Crude Oil price is currently $60.81/barrel.