2019: Half year round-up for investors

Published: 26 July 2019

The first half of 2019 saw markets largely recover from a dismal end to 2018, a year in which the FTSE All-World index had closed 12% down1.

Politics continued to dominate investor sentiment around the globe, with markets influenced particularly by developments in ongoing trade tensions between the US and China.

The backdrop was a slowing global economy. The economic expansion that has broadly persisted since the 2008 financial crisis looks ever-longer in the tooth, but key central banks continue to try and prolong it through their words and actions on monetary policy.

Buoyed by this approach from central banks, in the first half of 2019 markets broadly rebounded from a major wobble at the end of 2018.

As the second half of the year gets underway, we take a closer look at three key areas:

1. The economy

Share prices will reflect the revenues and profits made by individual companies and it’s easier for these to rise if the global economy is growing. A buoyant economy encourages consumers and businesses to spend and this is a more supportive backdrop for stock markets.

The UK economy had a relatively strong start to the year, with Gross Domestic Product (GDP) growing by 0.5% partly as companies stockpiled ahead of the Brexit deadline. That deadline came and went and the UK now has a new deadline for leaving the European Union of 31 October 2019. This extension prompted some weakness in the economy and estimated GDP growth for the three-month periods to April and May both shrank (to 0.4% and 0.3% respectively)2.

Across the globe, it was clear that trade tensions between the US and China were having an impact on economic growth, with trade growth for goods and services taking a particular hit according to the OECD3. Export-focused economies such as Europe and Japan saw collateral damage with year on year Consensus Forecasts for growth for both sharply down4.

Professional investors have been worrying for some time now that the economy is ‘late cycle’ (due for a downturn, in other words) and the trade war continues to shake confidence.

2. Interest rates

Official interest rates are one of the tools central banks have to influence the economies they are responsible for. Changes can affect different investments in different ways. So having an understanding of these can help you make decisions about your portfolio.

In early July, completing an effective reversal of its policy during the first half of 2018, the US central bank – the Federal Reserve – gave a clear indication that its next move in interest rates is more likely to be down than up5. Federal Reserve Chairman Jay Powell said that weakening economic data was a cause for concern and uncertainties had increased. The question became whether the central bank would cut rates as soon as late July and if so, by how much.

Against the background of the Fed’s changing position the European Central Bank (ECB) – which had pulled back from its quantitative easing programme at the end of 2018 – has again been discussing cutting interest rates and extending the loose (growth encouraging) monetary policy of which its quantitative easing had been a part6.

By contrast, the Bank of England was still warning of higher rates over the next three years in the early stages of 2019. It said a rise in growth above 1.5% in 2020 and 2021 would be enough for the UK economy to begin overheating7.

UK Growth for 2019 is currently projected at 1.2% by the International Monetary Fund (IMF) and 1.4% for 20208. And few economists believe a rate rise is currently on the cards: weakening data saw many predicting a contraction in the UK economy for the second quarter9.

Inflation also remains under control, only moving above the Bank of England’s 2% target once (in April) and noticeably lower than the same time last year10. The Bank of England Monetary Policy Committee kept rates steady at 0.75% at its meeting on 20 June 2019.

3. Stock markets

As you work towards meeting your financial goals, it’s sensible – and, for many of us, interesting – to keep track of what’s happening in the stock markets.

After a tough final few months of 2018, markets rallied in the first part of 2019. The Federal Reserve’s change in direction on US interest rates and a short-term resolution in trade tensions between the US and China encouraged investors back to the market.

However, there was a set-back in May as trade tensions escalated once again, sending markets lower11. US President Donald Trump announced plans to hike the tariff imposed on $200bn of Chinese goods from 10% to 25%. While the two sides had made an agreement and resumed negotiations by the end of June, investors recognise that the problems could linger even after a truce has been declared. These political tensions continue to be a dominant force in markets.

The FTSE 100 had gained 10% by the end of June from its 2018 close. This figure was 16% for the US S&P 500 index which was hitting new record highs12 by the start of July on the back of the renewed negotiations between the US and China13. Past performance is not a guide to future performance.

Looking to the longer term

Diversification remains important in all economic and market conditions. A well-diversified portfolio can help smooth out the ups and downs that inevitably come with investing. It can help you to benefit from the opportunities that are always out there and to manage your risks of loss.

Try not to get too distracted by short-term ups and downs in financial markets. Investing is for the longer-term. So it’s the developing longer-term sentiment you should also aim to focus on when making decisions about how best to manage your portfolio.

Important information

This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.

Please be aware that the value of investments can fall as well as rise so you could get back less than you invest. Past performance is not a guide to future performance.

1 CNN Business, Stocks fell just about everywhere in 2018, 31 December 2018
2 Office for National Statistics, GDP Monthly estimate, May 2019 (released 10 July 2019)
3 OECD, Economic Outlook May 2019
4 Financial Times, G20 meets as trade rifts heighten risks to global economy, 27 June 2019
5 Financial Times, Fed chair cements case for cut in interest rates, 10 July 2019
6 Financial Times, ECB ‘ready and prepared’ to ease policy amid rising uncertainty, 11 July 2019
7 The Guardian, Bank of England warns of interest rate rises over next 3 years, 2 May 2019
8 International Monetary Fund, World Economic Outlook, Growth Slowdown, Precarious Recovery, Chapter one, April 2019 (Table 1.1, page 8)
9 The Independent, UK economy likely to have contracted in second quarter, 3 July 2019
10 Trading Economics, UK Inflation Rate
11 The Guardian, Trump escalates trade war with China with plan to raise tariffs, 6 May 2019
12 S&P 500 notches record close on G20 trade relief, 1 July 2019
13 FTSE 100 closed at 6728 on 31 December 2018 and 7425 on 28 June 2019. S&P 500 closed at 2507 on 31 December 2018 and 2914 on 28 June 2019


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