Stock markets around the world pretty much fell in sync this month and it was all to do with one line crossing below another.
Fears of an impending recession have resurfaced and this always makes investors nervous, especially as stocks have been on a good run for a while now.
Remember though, not to base your 30 year retirement on 30 days of news!
State of play – the main world stock market indexes
| Region | Index | Last Month Performance | Last 12 Months Performance |
|---|---|---|---|
| UK | FTSE All Share | 2.65% | -3.48% |
| US | FTSE USA | 3.06% | 1.71% |
| Europe | FTSE Europe ex UK | 2.81% | -4.83% |
| Japan | FTSE Japan | 8.99% | -3.96% |
| Asia | FTSE Asia Pacific ex Japan | 1.97% | -4.44% |
Data sourced from investing.com and up to 27/08/2019.
What’s been going on?
The fall in stocks around the world this month has been mainly due to fresh fears of an impending recession.
The reason for these fears, an ‘inverted yield curve’. Let me explain.
Governments are constantly requesting loans to help their country function. In the UK these requests are called Gilts and in the US they are called Treasury Bills.
The government will pay interest on these loans and will also pay back the loan at the end of the term. The length of term is varied and can be anything from months to years and years.
Interest rates are set depending on the demand for the debt. Interest rates are low if lots of investors want to purchase government debt. Low demand and the interest rate is high. Usually the longer the term the higher the interest rate as there is a lot more that can happen during a longer timeframe and more risk of not being repaid.
What happened this month was that the interest (or yield as it’s also called) on 2yr gilts was higher than the interest on 10yr gilts. This is called an inversion. Meaning more people are worried about the short term rather than the long term. The same thing happened with US treasury bills.
In the past, an inversion has usually predicted a recession although it may not happen for a few years after. In which case you have to wonder whether it was the inversion that predicted it or is it just a coincidence?
Both UK and US inflation has risen this month meaning things are getting more expensive in the shops. This could get worse if the pound falls further on a no deal Brexit. You can find my article on whether you should be worried about a falling pound here.
The US in particular appears keen to keep the economy chugging along and there are predictions of an interest rate cut to quell on any talk of recession.
There was mixed data coming out of the Eurozone this month. Remember Germany’s economy shrank last quarter and with its manufacturing sector still struggling it’s quite possible Germany will officially go into recession next month. France however saw much better results.
The EU is ready to act though and it appears investors are expecting interest rate cuts soon, which should help give the economy a boost.
Italy’s Prime Minister has resigned and therefore a new government may no longer accept the financial rules handed down to them by the EU. Italy’s economy is struggling and they have a lot of debt. Remember Greece? The mood of the people may force the new government to spend spend spend to recharge the economy and defy the EU.
With all the uncertainty Japan is struggling with a strong currency. It has long been held that Japan as one of the great economies of the world, is seen as a safe haven when it comes to storing money in currency. This isn’t helping Japan with trying to export their goods and services as it makes them more expensive to the rest of the world.
China is still dealing with two major issues that do not appear to be going away any time soon. The ongoing trade war with the US has led China to devalue its currency. On the one hand this is a great tactic to offset US tariffs. On the other hand they want the currency to be seen to be stable as they would like it to be a future world reserve currency. Currency manipulation is never going to appeal to investors.
The other big issue is the protests in Hong Kong. Hong Kong is an important gateway for investment into Chinese companies. If there is any issue with trading in Hong Kong this could cause major disruption in China.
A POINT TO NOTE:
90% of your investment return is driven by your asset allocation (the mix of equities, bonds, property and cash etc) not the stock or manager you pick. If you would like help making sure you are using the right mix please contact us.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
