Markets buoyed by optimism over US-China trade talks
The United States and China have bolstered market confidence that they will roll back their trade war after officials concluded three days of negotiations in sanguine spirits.
During January, leading shares indices across Asia and Europe rose as brief but positive statements appeared to encourage investors. As American officials prepared to depart Beijing hopes were raised that the world's two largest economies could draw a line under their acrimonious dispute and reach a deal.
With a month left in their truce, senior US and Chinese officials will meet in Washington this week, hoping to move toward a bargain to end their unprecedented trade war. If no deal is reached by 2nd March, Trump has said he will proceed with raising tariffs to 25% from 10% on $200bn worth of Chinese imports at a time when China's economy is slowing significantly.
Trade and concerns over slowing economic growth triggered a selloff at the end of 2018 that culminated in Wall Street posting its worst monthly performance in a decade in December, driving down earnings estimates and stock valuations. The markets are therefore hoping for further constructive dialogue between the US and China.
Britain's steady growth to beat Europe's big players
Britain will grow at lease as fast as its biggest eurozone neighbours over the next two years as a sharp economic slowdown in the single currency bloc drags on global growth, the International Monetary Fund has said.
The outlook for the UK was left unchanged at 1.5 per cent this year and 1.6 per cent in 2020, which means that Britain is expected to grow faster than Germany and Italy and just as fast as France. Of the nations in the G7, only the United Stares and Canada are expected to outpace Britain. The euro-zone's outlook has changed remarkably over the past few months. the IMF has downgraded euro-zone growth from 1.9 per cent to 1.6 per cent this year. German growth cut from 1.9 per cent to 1.3 per cent and Italy from 1 percent to 0.6 percent. France was downgraded from 1.6 per cent to 1.5 per cent 'due to the negative impact of street protests' led by the gilets jaunes.
The emerging markets set for global domination
By 2050 these emerging markets will dominate global GDP rankings, according to PricewaterhouseCoopers (PWC), a professional services group.
This year India will overtake the UK to become the fifth largest economy in the world, according to the latest global GDP rankings. China will take second place, closing in on the US for the top spot, while Brazil moves in to ninth place.
By 2050 China will be the world’s economic superpower, with an estimated GDP of £49.8 trillion, more than 50 per cent larger than the second-placed US on £34.1 trillion, with India not far behind on £28 trillion. In fourth place is Indonesia, which makes an impressive jump of 12 places. Joining the list of emerging nations that are forecast to secure top-ten places are Brazil, Russia and Mexico.
Finally, as previously reported to the Reeves Investment Team, Brazil has been tipped to be one of the standout economies in 2019. Brazilian assets have rallied sharply since the election in October of President Bolsonaro, who takes office on New Year’s Day. If he can enact all the business-friendly policies he promised on the campaign trail, including tax simplification, independence for the central bank, privatisations and pension reform, an increase in investment and growth should follow. But that is a big “if”, as the new president lacks a majority in Congress.
At our recent monthly Reeves Investment Team meeting, we discussed the future prospects for the Emerging Markets sector and specific funds for possible inclusion in our model investment portfolios. Those options are still being considered and researched by the Reeves Investment Team, before any definitive action is taken.
Amazon takes title of world's biggest company for first time
Amazon was crowned the world’s most valuable public company this week, a milestone reached only 25 years after Jeff Bezos had founded the ecommerce giant in his garage.
When the closing bell sounded in New York on Monday, Amazon’s market capitalisation was $797 billion, pushing it past Microsoft, the former No 1, which was worth $784 billion.
Our clients' holdings in the Scottish Mortgage Investment Trust has a 9.7% proportionate exposure to Amazon. The Scottish Mortgage Investment Trust share price is recovering from a recent market-driven slide.
Rate rises hang in the balance as inflation hits two- year low
Inflation has tumbled to its lowest level in nearly two years and is now running a whisker above the Bank of England’s 2% target, putting further rises in interest rates in doubt.
Markets are now pricing in at most one 0.25-point rise during 2019, from the current Bank rate of 0.75%. Investors have also grown more cautious after December’s big sell-off in global stock markets, which helped to persuade the American Federal Reserve to scale back its own plans for higher rates this year.
In the event of a no-deal Brexit, markets are expecting rate cuts, ignoring warnings from Bank governor Mark Carney and other MPC members that interest rates could have to go up to 5.5% as inflation soars as high as 6%.
Higher interest rates mean bond yields rise (and bond prices correspondingly fall) to remain competitive. If you can get a risk-free yield on government bonds that equals or beats the yield on shares, which are riskier, you might switch money out of shares and into bonds. Also, higher interest rates threaten the real economy too by restraining growth, denting consumer confidence and potentially driving highly-indebted companies to the wall.
Lower inflation relieves pressure for interest rates to rise, which is positive news for the markets.
Share yields jump as markets slide
Yields on UK shares have risen to their highest level since the credit crunch after companies paid out record dividends as markets fell. The total amount of dividends on the main London stock market paid out last year increased by 5 per cent to £99.8 billion, driven by a resurgent mining sector, according to Link Asset Services.
At the same time stock prices suffered their worst year in a decade amid concerns over Brexit and global growth, with a sharp sell-off of 11 per cent in the fourth quarter.
The combined effect has been to send the prospective dividend yield for investors to an “exceptionally high” 4.8 per cent, a level not seen since March 2009.
Dividends are a key source of income for investors. The yield is the ratio between the company’s share price and its annual dividend, giving investors an indication of the returns they can expect. Although high yields can be attractive, they also can indicate that the dividend payment or even the company itself may be at risk.
This article is in the opinion of Reeves Independent financial advisers only and is not intended as advice and no investment decisions. The information in this blog or any response to comments should not be regarded as final advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding at January 2019.