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Market Insights – 23rd of September 2019

Each week, a team of experts shares its market views with you.

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Finance Banque Marchés

Essentials

Oil prices rose only slightly after the attacks on Saudi oil facilities, mainly because the country issued statements saying that the impact on production had been minimal. Uncertainty is still running high, however, and it’s surprising that the geopolitical risk premium on oil is not higher.

India cut its corporate tax rate on Friday, in a surprise move aimed at curbing the slowdown in economic growth, which came in at 5% last quarter. The rate was lowered from 30% to 25%, effective as of 1 April 2019. The Nifty Index rose sharply on the news.

The US economic surprise index has bounced back in recent weeks, and in September it moved into positive territory for the first time since February. This shows just how much economists have underestimated the resilience of the US economy and means we can rule out a recession in the near future.

Will the political clouds clear?

Economic agents have become much more bearish on the global economy. In recent years, there have rarely been so many articles about the risk of a recession. But with consumer spending on the rise, we think these fears are overblown. Spurred by the drop in unemployment and the increase in wages, consumer spending is doing well across the board and has yet to be dragged down by the more lacklustre manufacturing sector, which has been hit hard by the US-China trade war. But tensions could ease as Donald Trump gets ready for the campaign trail and his re-election bid in late 2020. The Middle East has also moved back into the spotlight as another source of geopolitical tensions.

Central banks, especially those in the world’s main economic regions, are having to take steps to counter these political uncertainties. Inflation remains under control, so interest rates are being cut almost everywhere. Some central banks have also started printing money again, starting with the European Central Bank (ECB), which has announced a new asset purchase programme. As a result, Swiss and eurozone sovereign bond yields are among those that have plummeted to new lows. And negative yields have become more widespread on the capital markets, except in certain countries, like the USA and Italy, and in some riskier segments of the bond market. We have therefore increased our weighting in US corporate bonds and reduced our exposure to eurozone and Swiss paper. Other asset classes can provide an attractive alternative to the paltry returns offered by bonds. Equities offer the best prospects, since valuations are still reasonable on a historical basis.

Real estate should also fare well in the current climate. On top of Swiss real-estate funds, which are included in CHF-denominated portfolios, we have added international real estate to all of our investment profiles through a specialised fund. And in terms of currencies, the US dollar should do well, given that both nominal and real interest rates are negative in Europe. Emerging currencies still offer some upside, especially if the trade tensions ease.

October will be a crucial month for the UK

In the UK, it’s still not clear how Brexit will pan out, even though the 31 October deadline is fast approaching. The chances of a no deal have declined, but there are still several other possible scenarios. A deal could be reached, or Article 50 could be extended to leave time for another general election or a second referendum. Whatever happens, one thing’s for sure: UK companies and consumers have spent the last three years with very little idea of what the country’s future relations with the EU will look like, and several politicians have paid the price for this.

Up until recently, economic data had been quite robust, mainly because of Brexit stockpiling, but the latest figures are much weaker and point to a sharp slowdown in domestic demand. Unsurprisingly, the lack of visibility has prompted many companies to halt their investments, a trend that is now gathering momentum.

Although a no-deal Brexit would hit the UK economy hard, it is likely to have less of an impact on the stock market, as 70% of UK corporate revenues come from abroad. UK stocks have underperformed other markets since the Brexit referendum, and their discount relative to the rest of the world is at an all-time high. On top of that, the pound is weak, which will increase the UK market’s appeal once the uncertainty has faded. In the meantime, sterling is still a good way of gauging Brexit-related stress levels.

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