US-China trade-war negotiations were among the biggest drivers behind investor sentiment in November 2019. In spite of the two economic power-houses having showed glimpses of a consensus being reached, the month closed on a sour note after the US passed two bills antagonising China. Risk assets declined on worries over how the Chinese might react, suggesting that a trade consensus is far from being reached. In South Africa, the local bourse sold off over trade-war uncertainties, which were compounded by poor economic data and further outlook downgrades by ratings agencies S&P and Moody’s.
US
US-China trade talks were dealt a blow after President Trump signed two bills into law: the Hong Kong Human Rights and Democracy Act of 2019, which made provision for the US to penalise Chinese officials for human-rights violations in Hong Kong; and a bill that bans the sale of weaponry (such as tear gas and rubber bullets) to Hong Kong police.
In other news, after cutting its target rate by 25bps as expected, the US Federal Reserve said further rate cuts for 2019 were unlikely provided that there were no fundamental changes to the economic outlook and that inflation remained at around the 2% mark. Current inflation is 1.8% which was boosted by an increase in the cost of food and medical care services.
In economic news, GDP was revised higher from 1.9% to 2.1% The unemployment rate increased to 3.6% in October 2019 from 3.5% in the previous month, in line with market expectations.
UK and Europe
In the UK, stocks were bolstered after poll results indicated a solid majority for the Conservative Party for the upcoming December general elections, which is expected to bring an end to the long-running Brexit uncertainty.
In economic news, preliminary estimates showed that Britain’s economy expanded 0.3% q/q in Q3 2019, recovering from a 0.2% q/q contraction for the previous quarter. Meanwhile, CPI in the UK fell to its lowest level since November 2016, coming in at 1.5% for October 2019, down from 1.7% for the previous month and below market expectations of 1.6%.
Germany, the biggest economy among EU member states with 21% of total GDP, managed to miss a recession after GDP growth expanded 0.1% q/q in Q3 2019 following a 0.2% q/q contraction in the previous quarter.
Asia
Trade negotiations between the US and China came under pressure after China threatened retaliation in response to the US bill supporting Hong Kong’s protesters. The Chinese Foreign Ministry lodged a formal protest, accusing the US of supporting violent criminals in Hong Kong and undermining the “one country, two systems” principle.
In economic news, the Chinese economy expanded by 1.5% q/q for Q3 2019, in line with market consensus and marginally lower than the 1.6% q/q growth recorded in the previous quarter. Annual inflation rose to its highest level since January 2012, coming in at 3.8% in October 2019.
In Japan, the House of Representatives cleared a bill to tighten regulations on foreign investments in listed Japanese companies that have ties to national security, including the production of arms and nuclear energy. The purpose of the bill is to strengthen investment controls, amid growing concerns about possible leaks of sensitive information and critical technologies to other countries.
Economic indicators coming out of Japan showed CPI increasing 0.2% in October 2019. Japan’s GDP grew by 0.1% q/q in Q3 2019 from 0.3% q/q for the previous quarter and below market expectations of 0.2% q/q.
Global returns
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 2.5% in November. Developed markets outperformed emerging markets, with the MSCI World Index delivering 2.8% and the MSCI Emerging Markets Index returning -0.1%.
Among developed markets, the S&P 500 produced 3.6%, the UK’s FTSE 100 returned 1.8% and Japan’s Nikkei 225 delivered 0.3%.
South Africa
In South Africa, the SARB kept the repo rate unchanged at 6.5% as expected, however, downgraded its GDP forecast for 2019 from 0.6% to 0.5%. Forecasts for 2020 and 2021 were also revised lower to 1.4% (from 1.5%) and 1.7% (from 1.8%), respectively. Meanwhile, global ratings agencies S&P and Moody’s downgraded the outlook on SA’s credit rating from stable to negative, citing low economic growth and rising fiscal deficits as concerns facing the economy.
Annual inflation fell from 4.1% in September to 3.7% in October 2019, its lowest levels since February 2011 and below market expectations of 3.9%.
The FTSE/JSE All Share Index returned -1.8%. The average Multi Asset low equity fund returned -0.21%, while the average Multi Asset high equity fund returned -0.63%.
Adapted article by Prudential Investment Managers