In a week of mixed fortunes for global investors, those with government bond allocations were much happier. Most global equity markets sold off as a cocktail of events conspired against investors.
China’s domestic stock market proved resilient as U.S. and European equity markets fell. The Shanghai Stock Exchange 180 Index 1 was up 1.0% by the close of the market Thursday, March 7 close.
The week started well after Morgan Stanley Capital International (MSCI) increased the weighting of Chinese A-shares in its emerging-market indices. The A-share market currently comprises only around 0.7% of the MSCI Emerging Markets Index 2 benchmark. But this will rise to around 3.3% by November 2019, which will force index-tracking funds to increase their weightings accordingly. Active investors have been anticipating this shift, but it puts this market on more radar screens.
Bulls in the China shop
The strong start to the week from the A-share market came despite further signs of a slowing Chinese economy. During the week, the government cut its official growth target for 2019 to a range of 6.0% to 6.5%. Meanwhile, the Caixin/Markit services purchasing managers’ index 3 was weaker than expected at 51.1 for February. This was the lowest reading for four months.
However, this gloomy picture is resulting in some positives for China’s companies. In an attempt to stimulate the slowing economy, the Chinese authorities have been cutting taxes. Beijing reduced the top rate of the value-added tax (VAT) by 3 percentage points to 13%.
ECBottoming? Not quite
The European Central Bank (ECB) revised its growth and inflation expectations downward for 2019, finally catching up with economic reality. The ECB announced another targeted longer-term refinancing operation (TLTRO) designed to give banks access to cheap funding. This, allied with low interest rates, is a stimulus, but is also a reflection of a troubled economy. Nevertheless, we believe that there could be a rebound in growth in 2020 relative to 2019’s low base, but are conscious that risks are skewed to the downside.
Another international body that is slow to change its opinion is the Organisation for Economic Co-operation and Development (OECD). Despite the International Monetary Fund (IMF) cutting its 2019 global growth forecasts back in January, only now has the OECD slashed its estimate from 3.5% to 3.3%. In its statement, the OECD put particular emphasis on Europe and on the potential consequences of a “no-deal” Brexit.
Wall Street woes
In the U.S., the broader-market S&P 500 Index 4 was down 2.0% by the close of the market on Thursday, March 7. E-commerce titan Amazon was among the notable decliners. In our view, the company’s mooted move into supermarkets may put pressure on its margins at a time when its web-services business–Amazon’s most profitable segment–is facing fiercer competition.
However, Amazon’s ambitions were the cause of considerable disquiet among investors in supermarket operators. Shares of Kroger plunged on Wednesday as disappointing fourth-quarter 2018 results were compounded by the competitive threat from Jeff Bezos’s behemoth.
Lower for longer
European stocks also performed poorly during the week, with the FTSE (World) Europe ex UK index 5 falling 0.5% through Thursday’s market close. Banks led the declines on the back of the ECB announcement. Keeping interest rates “lower for longer” has negative implications for banks’ profitability—and for the euro, which fell to a 21-month low against the U.S. dollar.
In the UK, the FTSE 100 Index 6 was relatively unaffected by the global sell-off.
However, this appeared to be largely due to a weaker British pound. This benefits many of the FTSE 100’s constituents because they earn the bulk of their earnings overseas—earnings that are magnified when the pound falls. In contrast, the more domestically focused FTSE 250 Index 7 encountered a bumpier ride. As of Thursday’s close, the mid-cap index was down 1.1%.
1 The Shanghai Stock Exchange 180 Index tracks the daily price performance of the 180 most representative A-share stocks listed on the Shanghai Stock Exchange. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
2 The MSCI Emerging Markets Index is an unmanaged index considered representative of stocks of developing countries.
3 The Caixin/Markit services purchasing managers’ index tracks manufacturing activity in China.
4 The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market.
5 The FTSE World Europe ex UK Index tracks the performance of large- and mid-cap stocks in developed markets in Europe, excluding the UK.
6 The FTSE 100 Index is a market capitalization-weighted index of the 100 largest companies traded on the London Stock Exchange.
7 The FTSE 250 Index comprises the 250 largest companies listed on the London Stock Exchange after the FTSE 100 Index constituents.
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