Weekly market recap – Recession risk recedes

Europe’s largest economic powers narrowly avoid recession, while the S&P 500 yet again reaches all-time highs.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 15th November 2019

Propelled by the thrust of a jet engine, the Bloodhound has joined the exclusive club of only seven other land speed racers that have gone faster than 600mph. To put its 628mph speed into context, that’s faster than the cruise speed of airliner!

Emerging markets suffered some problems in their engine rooms last week as the region underperformed its developed peers. Asset class returns in sterling and local currency are below; while the S&P 500 once again reached all-time highs, last week’s data releases provided breathing room for politicians in the UK and Germany.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

Following contractions in gross domestic product during the second quarter of 2019, data releases last week for the third quarter revealed that Europe’s two largest economic powers narrowly avoided a recession. Germany, Europe’s largest economy, avoided an imminent recession as economic output expanded by just 0.1% in the three months to September. Meanwhile in the UK, the economy expanded at 0.3% over the same period as the headwinds from production industries died down. Though both economies have faced their own unique challenges within their respective manufacturing industries, the two countries have both struggled with the broader geopolitical backdrop of a US-China trade war.

Chart 1: The services component of UK GDP continues to be the driving force behind economic output while production industries (such as manufacturing) have acted as a headwind

Source: Bloomberg

It’s not all down to trade though. As we have mentioned in previous weekly updates, a number of industries in both economies have suffered significant idiosyncratic headwinds. For example in Germany, the most prominent factor has been the aggressive slowdown in the automotive industry which has been caused by bottlenecked production following the introduction of new emissions testing standards. In the UK meanwhile, a Confederation of British Industry survey reported how business optimism across the UK’s service sector has fallen sharply, causing anaemic business investment as businesses hold back expansion plans.

The chart below shows the GDP growth rates of Germany and the UK and how they fall amongst other G7 countries. The hit to both countries growth rates has seen them fall from near top of the rankings in 2016-17, to a position where Germany is only just above Italy for the worst performing advanced economy. With the UK’s growth rate now also appearing to lose momentum, it is possible years of suppressed business investment is taking its toll on growth.

Chart 2: With the pink area indicating the range of G7 growth rates, the UK has historically remained relatively high in the rankings but has fallen as years of suppressed business investment has taken its toll

Source: Bloomberg

With the UK election campaign now in full swing, the future direction of the UK economy is all to play for. That said, our analysis a few weeks ago indicated significant momentum building behind the Conservative party’s polling figures. If we see a Conservative majority materialise following the election, the Prime Minister will likely once again attempt to push his deal through the House of Commons.

STAT OF THE WEEK: 40% – the estimated proportion of the world’s population that will live in “seriously water-stressed” areas by 2035 (Water Mandate).

Data correct as at: 15/11/19

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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