Equity markets were rather more sanguine during the third quarter, following a strong upward trend in the first half of 2019. The notable exceptions over the quarter have been the equity markets of the US and Japan.
Heading into the final quarter of 2019, our concerns surrounding global growth have been elevated, particularly given the increasing political risks at home and abroad and global trade tensions.
There are increasing doubts as to whether companies will be able to continue increasing profits in what we expect, is a late-cycle environment. This view has been supported by the recent downward adjustment in corporate profits in the US, which all but wiped out the post-2016 US profit increase. In general terms, we have seen corporate profit growth softening across the globe over the year.
Trade tensions of course continue to play a role. A prompt resolution that would settle the one-and-a-half year spat between the US and China has become less likely, with news flow from China becoming more influential in equity market reactions, while the prospect of a sudden rupture between the UK and EU and the trade disruption this would cause is becoming an increasingly likely scenario.
Recent economic data around the world has been mixed. Whilst the US economy appears to be supported by consumer spending, the manufacturing and business investment data is weaker. Outside the US, a deceleration is more apparent with China slowing and European GDP contracting in the second quarter, particularly in Germany and Italy.
Central banks, led by the Federal Reserve, have started to cut interest rates, but outside the US there are limits as to how much they can be cut, given many countries are already at, or below zero interest rates. In addition, there are growing doubts about the effectiveness of further quantitative easing, particularly in Europe.
While we do not want to read too much into short term market movements, we believe there is reason to be concerned about deteriorating fundamentals, both on the macro and the corporate side, and increasingly unpredictable geopolitics have the potential to inflict major shocks.
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