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Views on the News

04 November 2019

3 minute read

A weekly round-up of the leading business, personal finance, investment, savings and pensions stories in the press from the past week, including analysis and opinion from BIS experts.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • Brexit: Another extension from the EU paves the way for a December election
  • US Federal Reserve: A third cut in rates in just four months
  • Share markets: good value or expensive?

Jingle polls and a ‘flextension’

Prime Minister Boris Johnson formally accepted the EU's offer of a Brexit extension until 31 January 2020. EU Council President Donald Tusk said that what was being offered was a ‘flextension’ – meaning the UK could leave before the deadline if a deal was approved by Parliament. Following the EU’s decision, MPs backed Boris Johnson's call for an election following months of Brexit deadlock. By a margin of 438 votes to 20, the House of Commons approved legislation paving the way for the first December election since 1923. Meanwhile, the UK manufacturing PMI from IHS Markit/CIPS rose to 49.6 in October from 48.3 in September. This is the highest reading since April – although the sector continues to shrink. Activity was boosted by manufacturers building stocks ahead of the 31 October deadline for Brexit, according to IHS Markit.12

Our view: We would like to make/reiterate the following four points:

  1. Calling elections is not an area we see ourselves (or anyone else) having a particular edge
  2. There is a general consensus that this will be one of the most unpredictable elections of modern times
  3. There are now many more scenarios where the UK economy bumps along at the same pace or improves a little from this point rather than deteriorates markedly
  4. Part of this calculation on the UK economy is that the chances of a no-deal exit have declined materially in the last few months, albeit certainly not disappeared (Will Hobbs, CIO).

US Federal Reserve cuts rates again

The US central bank cut interest rates again, hoping to shield the economy from the impact of trade wars and a global slowdown. The Federal Reserve lowered the target for its benchmark rate by a quarter point, to a range of 1.5% to 1.75%. The move was the third cut in four months. The decision comes as US economic growth slowed to an annual rate of 1.9% in the most recent quarter. Fed Chair Jerome Powell said that risks to the economy had subsided since the last meeting, pointing to the possibility of a limited ‘phase one’ US-China trade pact and reduced odds of a no-deal Brexit. Mr Powell suggested that he does not expect the bank to change rates again unless economic conditions worsen unexpectedly. Meanwhile, US employment was more resilient than expected in October despite the impact of strike action at General Motors. Companies added 128,000 new jobs last month, ahead of a forecast 85,000 rise. The US economy grew at an annual rate of 1.9% in the third quarter, which was the slowest rate this year but above some analysts' expectations.34

Our view: A very busy week for important economic statistics leaves us at the margin a little more confident that a global recession is not in the offing. It would be overstating it to suggest that the all-clear has been sounded. However, incoming US and other economic data point to a world economy that is in the process of finding a floor rather than lurching further lower (Will Hobbs, CIO).

Are share markets cheap or expensive?

Last week marked the 90th anniversary of the start of the Great Depression – a global economic slowdown and market crash so deep that it took the US market 25 years to reach its previous peak. Subsequent downturns and market falls – 1987, 2000 and 2008 – did not take nearly as long to recover. It's hard to invest if you think there's a fall on the horizon but the most recent recessions highlight that after every fall comes a sharp rise. Markets correct themselves and leave people (who stayed invested) back where they started and on a good foundation for growth. What is often forgotten in recessionary situations is what actually makes a good investment. It doesn't matter when the next market rise or fall comes – what matters is the price you pay. The general perception today is that stock markets are expensive. They have steadily risen since 2009, making investors excellent returns along the way. The price-to-earnings ratio – a common measure of a stock’s valuation – shows that the US market is the only major market which is more expensive than its long-term average. Even then, it is only marginally higher and still a long way off its peak. UK and European stock markets are both slightly below the average since 1990, and Japan and the emerging markets are currently far below their long-term average. This means there could be room for share prices to rise before the next major fall. Even if they don’t, investors still would have bought at a good price for the long-term. What is important is that investors are not swayed by short-term economics and always focus on long-term value. 5

Our view: Valuing shares tends to be a more subjective exercise than many commentators allow for. For instance, when trying to assess whether the S&P 500 (index of largest US companies) today represents good value, what should we compare it against? We can look at referencing its own history – but the more history we take in, the less relevant the types of companies quoted, the economic backdrop and other factors become. We are currently happy to argue that collectively the world’s shares are neither materially cheap nor expensive. In such a context, it remains plausible to argue that investors will manage to bank whatever dividend the corporate sector pays out added to some growth in that dividend payment. That still likely remains far in excess of anything you are going to receive from investing in the bond market (lending to companies and governments) (Will Hobbs, CIO).

The fear of volatility is often more damaging than volatility itself. It is understandable that investors are cautious right now. In the UK there is a lot of political uncertainty and media coverage can seem to portray an overwhelmingly negative sentiment. These negative associations often influence our thoughts in other contexts, such as our outlook for investing, without due consideration of if they actually have much of an effect.

The current economic cycle is indeed long in the tooth but investors who let this be a barrier risk missing returns in the long term. Although we know that a market downturn will come at some point, the exact timing and severity remains as unknowable as ever. Investors are not helped that the last recession, the financial crisis, was particularly extreme and this will skew our view of what the future will hold. There will no doubt be testing times ahead; short-term drawdowns can test even the most stoic investors. During the financial crisis the maximum drawdown was over 50% but we can take some solace that the median return during post-war US recessions was actually positive (6%).

As Peter Lynch, a very successful investor said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” The most sensible guidelines – where investing is appropriate – remain; get invested, stay invested and focus on what’s important, what you are trying to achieve in the long run (Robert Smith, Head of Behavioural Finance).

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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