Weekly market recap – an industrial impediment

Markets ascend following further US-China trade talks, and Boris's new Brexit deal.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 18th October 2019

It was a bad week for Trump’s border wall last week as an eight-year-old managed to scale the supposedly unclimbable structure in just over a minute. The US president describing the wall as “virtually impenetrable” which sparked a retired engineer to build a replica section in order to test the claim. I’m sure Trump will get over it…

Equity markets were on the ascent last week as traders and investors revelled at the positive sentiment emerging from both the US-China trade talks and the UK and EU agreeing a new withdrawal agreement. Asset class returns in sterling and local currency are below; with the most notable point is the marked difference between local and GBP returns last week which is a result of the pound strengthening close to 2% versus the US dollar.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

With our domestic political situation unfolding by the hour and the risk rising that a weekly update is rendered meaningless before the day is out, our focus this week is with the global manufacturing trend which continues to be weak. The manufacturing slowdown has been an area of significant discussion in recent months, made topical due to the sector being a casualty of the US-China trade war and the subsequent threat it poses to industrial centred economies like Germany and China.

Indeed, over the past year we’ve seen the German economy repeatedly flirt with a technical recession – a term used by economists for two consecutive quarters of negative economic growth – as well as a protracted economic slowdown in China which has led to the country’s slowest growth rate for nearly 30 years. Though, 6% annual growth is a figure dreamed of by developed economies, it is unnerving for the global economy given China is currently by far the largest single contributor to global growth.

Chart 1: In recent years China (illustrated in navy blue) has become by far the largest single contributor to global economic growth, contributing 0.8% of the world’s 3% growth in 2018

Source: Bloomberg

Data released last week continued to point towards weakness across the manufacturing sector in the developed world as the US, Eurozone and Japan all posted negative year-on-year changes in industrial production. This was a particular surprise for the US where month-on-month factory output fell 0.5% due to a strike at General Motors. This had wide reaching consequences for the US automotive industry which itself saw a sharp contraction. Meanwhile in the Eurozone, even though data pointed to an expansion last month, economists seem in broad agreement that global headwinds facing industry are not about to abate and likely to get worse before they eventually improve.

Chart 2: While the global manufacturing sector has slumped from its 2017 highs, the services sector has shown resilience which has helped avoid deeper economic pain

Source: Bloomberg

The chart above shows a broad gauge of global economic activity broken out by its manufacturing and services components. While manufacturing is indeed shown to have slumped since its 2018 highs, the services sector has been resilient staving off deeper economic pain.

STAT OF THE WEEK: 2.3 to 19.3% (China), and 31% to 16% (EU) – the share of Global GDP in 1980 and 2019 respectively (IMF).

Data correct as at: 18/10/19

About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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