29 March 2019 – quarter end

The vexed date has come and gone, as we had suggested, but not quite in the manner we had expected. While the population widely blames Parliament and the political class in general for the Brexit execution debacle, MPs are just as divided as the entire nation over the UK’s 2016 decision to quit the European Union. The consequence is that as the number of possible options for an orderly exit rapidly reduces day by day, the ‘overtime’ required to solve the impasse through an extension has increased substantially over the course of the week.

This is frustrating and costly for all who were expecting the return of some level of planning certainty, particularly the business community. But it probably reflects fairly on what is at stake for the nation and how passionate so many people feel about it.

The EU: rocks and hard places

We have been positive on the mid and long-term case for European equities, and we remain so. However, recent economic data suggests that Europe is (back) in trouble. This presents a challenge to our view, so it’s worth looking at in more detail. Let’s run through the worries before we get to a more positive perspective.

Brexit continues to exacerbate (or cause, depending on the point of view) internal Eurozone (EZ) destabilisation. It has definitely become a greater concern for Europe since the start of the year. The looming shake-up of the European trade framework of the past four decades appears to be worrying businesses and individuals to the extent that domestic cash-piling by companies is noticeably boosting money supply. That rise in liquidity unfortunately appears to be at the expense of business investment, while European (German, really) individual savings rates are going higher, despite already being the highest in the developed world.

China rally, more sentiment than hard data

2019 has been a good year so far for Chinese stocks. Since the end of 2018, the Shanghai composite index has risen almost 24%. In the same timeframe, the tech-heavy Shenzhen composite has shot up almost 37%. This is a stark contrast to last year, when the double whammy of a slowing economy and President Trump’s trade war sent Chinese equities into ailspin. Now, investors seem hopeful that both of these are changing for the better

Yield curve’s predictive powers dissected

Those seeking distraction from UK’s domestic woes will have noticed a lot of attention over the past weeks about the US yield curve and its various inversions along different maturity profiles: 10y-3m, 5y-2y, and a few others.

What this actually means is that bond investors can get a higher yield when lending their money to the US Government for a short period than a long time. As an example, currently bond holders are compensated the same (per year), for being tied in for 1 year as 10.

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