MONTHLY MARKET BLUEPRINTEconomy slows, markets rallyJuly 2019

CONTENTSMarket performance 1

Asset allocation 2

Risks ahead 3

Global macroeconomic backdrop 5

UK macroeconomic backdrop 6

US macroeconomic backdrop 7

Europe macroeconomic backdrop 8

Japan & emerging markets, macroeconomic backdrop 9

Macro Theme 1: Global growth slows 11

Macro Theme 2: Central bank spotlight 12

Macro Theme 3: The Brexit conundrum (Redux) 13

Fixed Income Spotlight: Shift in the yield curve 14

Equity Spotlight: Disparate emerging market returns 15

Equity Spotlight: Still an opportunity? 16

1

Source: Mazars calculations

MARKET PERFORMANCE – IN A NUTSHELL

The month in review: Both stocks and bonds see strong returns in JuneJune saw continued strong performance of both global equities and bonds as the Federal Reserve adopted a far more dovish tone in response to the weaker economic backdrop and muted inflation. Markets are pricing in 3 rate cuts before the end of the year, ahead of the number implied by the Fed’s forecast. The S&P 500 hit new all-time highs and the US ten year yield has fallen to around 2%, with technology and materials stocks as the best performing sectors. Global stocks returned 3.2%, US equities returned 3.7% and UK equities were up 2.3%. All returns are in Sterling terms. The large US technology companies ( FAANG + Microsoft) continue to post solid returns, despite the threat of antitrust law regulations growing traction. A no-deal Brexit has increased in probability with the growing support for Boris Johnson to succeed Theresa May as PM; Sterling fell over the month versus the Euro, boosting returns from overseas assets. Presidents Trump and Xi met at the G20 summit last weekend

and have agreed to resume trade talks, with the current tariffs on hold for the time being. Huawei has also been granted the right to do business with US firms again, which was not expected by political journalists. Gold crossed the $1340 mark, a critical resistance level, as capital moved towards safety haven assets and the US dollar fell (Gold and the Dollar are typically negatively correlated). Russia and Saudi Arabia have agreed to extend the OPEC+ oil output deal to limit supply for the next nine months. The existing limits will apply which should provide support to prices, despite slowing global growth and increasing US supply; oil prices rallied 2% in Dollar terms in the last week of June as a result.

Both financial and real assets saw great returns in June and as a result multi-asset portfolios have performed well. Political uncertainty still weighs on the economy, whether that be in Italy, the UK or US, but with valuations moderate and liquidity abundant, investor sentiment is still good.

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Equities Fixed Income Commodities Currencies

Source: Mazars Calculations, from 31/5/2019 to 30/6/2019 = Local = GBP,

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ASSET ALLOCATIONOutlook and portfolios• Global economic data for June indicated that the global

economic slowdown continues. Pockets of resilience can still be found where domestic demand is strong, but where external demand is driving the ecosystem, weakness persists.

• Data out of China have somewhat stabilised but are still soft. Weakness out of Europe and Japan indicates that the rebalancing act for the world’s marginal buyer continues on a rocky path.

• Risks for global growth are increasing: Trade wars, Brexit uncertainty and the Chinese slowdown, along with the fact that the cycle is now the longest on record may unnerve investors. Central banks are increasingly, and somewhat competitively, accommodative and the Fed’s persistent assuaging of investor anxieties certainly helps those investors willing to buy on a dip.

• Asset allocation was marginally positive for June. We gained significantly from our overweight in gold, which rallied in the last part of the month, while we slightly lost due to our exposure in UK property.

• In June, the investment committee felt that conditions in the UK have worsened and that probabilities of a “Hard” Brexit have climbed. Therefore, we reduced weight in UK small cap stocks and UK property and increased weight in US stocks, gold and cash. We don’t maintain strong geographical preferences at this point, awaiting more visible catalysts going forward. We still believe that the cycle, for the time being, remains intact but it is showing increasing signs of maturity.

Asset Allocation based on the Mazars Balanced Portfolio, as of 1 July 2019.

3

Charts Source: Mazars calculations

RISKS AHEAD

• Economics and markets have again decoupled. Global economic growth is slowing but risk assets continue to soar, with the S&P 500 at record levels. Analysts are mostly focused on risks stemming from protectionism, the European and Chinese economic slowdown and global debt levels. The main global risk at this point is economic mercantilism and “beggar thy neighbour” policies which lead to further loss of global output. As last year’s US fiscal policy initiatives petered out, central banks once again picked up the growth baton and became more accommodative.

• In terms of liquidity, the risk now is that markets become too dovish about central bank intentions and are eventually disillusioned if policy doesn’t follow through.

• In the US the main risk is an economic slowdown, after Q2 2019, when the effect of the tax-cut stimulus is expected to expire. Additionally, investors have yet to discover the true depth of recent tax reforms, which could put additional strains on the budget.

• In the UK we have seen some of the impact of Brexit uncertainty in the form of slower growth, dented consumption, a slowdown in house prices and companies considering new venues. Probabilities of a “Hard Brexit” have risen.

• In Europe, fears for the fate of the EMU have somewhat abated, as Italy stood down on budget giveaways and Draghi’s successor was found. Worries about the fate of Deutsche Bank (which has been forced to restructure) and Non Performing Loans across the Eurozone persist.

• In China the slowdown also persists.

• We feel that short-term systemic risks are mostly manageable as liquidity is still ample. However we are monitoring the increasing number of headwinds, the confluence of which could upend the economic and financial cycle.

Markets and economics have decoupled. Over the long term, this could be an issue

The difference between the expectations of investors and the intentions of the Federal Reserve is a concern for risk assets.

S&P 500

Where the Fed says Rates will be

4

THE MACROECONOMIC AND MARKET BACKDROP

5

Charts Source: Mazars Calculations

GLOBAL

Economic news continued to disappoint globally.

Exporters continue to suffer from weakness in external demand.

• Global equities staged an impressive rebound, after weak performance in May, as a more dovish Fed and a good outcome from the G-20 meeting assuaged short term investor fears and drove key equity indices near cycle highs. In Sterling terms, global stocks gained 6% spearheaded by Materials and Technology, while the more defensive Telecoms and Utilities sectors lagged. Global stocks are trading at 16.4x P/E, above their ten year average of 14.9x.

• Global growth continued to feel weak during June. In the past few months, what has become clear is that economic ecosystems which rely on exports have suffered from weak cross-border demand, especially of capital goods, whereas areas which rely on domestic demand have thrived. Global manufacturing has remained persistently slower, whereas services, usually more domestic-oriented, have slowed at a much more manageable pace, with some strong pockets of demand. Global inflation has come down, even at the face of near-full employment for key economies. Slower growth and lower inflation have prompted central banks to adopt an even more dovish stance, with the Fed now opting for at least one rate cut this year. US growth has slowed, but not significantly, whereas growth in Europe and Asia remained tepid.

• Outlook: We feel that the global economy is due a cyclical turnaround and we continue to expect growth conditions to eventually rebound, however that horizon is now slightly extended. Companies are still eating away at their inventories and backlogs which suggests further weakness ahead. Risk assets overall are well supported by central banks, however at some point either the Fed will have to cut rates aggressively or markets will have to proceed with a re-rating of stocks and bonds.

Economic surprises

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Charts Source: Mazars Calculations, BOE

UK

• UK stocks rose 4% in June, with Healthcare and Industrials as the best performing sectors while consumer related stocks lagged significantly. The forward P/E ratio for UK stocks is currently 13.19x, slightly lower than its 10 year average of 13.3x. The Pound was weak while the yield remained below 1% to 0.8% (June 5).

• While Q1 GDP accelerated to 1.8%, once again beating expectations, data for Q2 have been giving cause for concern. Brexit anxiety has affected internal demand, so the economy failed to compensate for weak external demand conditions Manufacturing contracted (PMI 48) at the fastest pace since February 2013 due to weak new orders. The service sector stagnated (PMI 50.2) due to sluggish domestic economic conditions and increased risk aversion. Construction data suggested the sharpest drop in three years, with various surveys indicating that house prices have stagnated across the country. Brexit uncertainties continue to delay or cancel major investment spending and overall policy decisions. Inflation eased (2% down from 2.1%), as did core inflation (1.7%), while employment conditions remained robust.

• Outlook: Theresa May’s resignation and the process to elect a new Prime Minister have further slowed down developments on Brexit, the key determinant on the UK growth outlook. While the OECD recently upgraded its outlook on British economy and GDP data once again surprised to the upside, we remain guarded as far as the economy is concerned, and our internal model suggests an increased probability of a Hard Brexit. Non UK-economy related risk assets should continue to have a negative correlation to the Pound.

UK Manufacturing PMI retreated, as inventory building has now petered out. The service sector remains resilient.

UK construction contracted significantly in June

UK Manufacturing PMI

UK construction PMI

7

Charts Source: Mazars calculations

US

• US equities rose 6.5% in Sterling terms driven by Materials and Energy, whereas Utilities and Homebuilding lagged. US stocks trade at a 17.92x forward P/E, significantly above their 15.5x long-term average. The yield on the 10 year bond fell to near 2%.

• The US continued to outperform the rest of the world, however we have seen increasing signs that global weakness has not left the world’s biggest economy unaffected. On the bright side, Q1 final growth came in at 3.1% (annualised). In terms of sentiment, both businesses and consumers remain optimistic, although the protracted trade disagreements with China have caused significant concerns. However, overall manufacturing data remained weak, with capital expenditure tepid, leading regional indicators falling in synchrony, new orders stagnating and companies eating into their backlogs. Housing data continue to indicate weakness, with prices now rising very slowly. However, the services sector continued to expand at a healthy pace, with new orders rising robustly. Employment numbers have been somewhat weak and inflation has been tepid, allowing the central bank to adopt an even more dovish rhetoric which has caused markets to hope for even three rate hikes this year.

• Outlook: We are positive on US risk assets despite the fact that the effects of last year’s tax cuts on earnings have now fizzled out. We believe that the Federal Reserve will remain on thecourse towards dovishness over the short and medium term, as it is possible that the economy will now enter a phase of weakness and maybe see a rise in unemployment when companies finish eating away into their backlogs.

Manufacturing conditions have deteriorated, while the service sector has picked up the slack.

Despite the worsening economy, small businesses are still upbeat about the future.

US fwd relative PE to MSCI world

Manufacturing new orders PMI

8

Charts Source: Mazars calculations

EUROPE

• European equities rallied last month as markets regained strength globally. European equities were up +6.6% in Sterling terms and +5.3% in local terms.

• Growth conditions in the Eurozone were strong in June as the services sector enjoyed a solid rise in activity which was the best in eight months. France reported solid gains in both services and manufacturing activity and saw an increase in new export orders globally. The Markit services PMI for the Euro zone was 53.6 in June, up from 52.9 last month. Manufacturing activity on the other hand, continues to suffer as goods producers reported declines in production for the fifth consecutive month. A challenging economic environment characterised by ongoing global trade tensions and political uncertainties, plus ongoing underperformance in the autos industry, led Europe's largest manufacturer, Germany, to remain in contraction territory. A fall in new work orders continues to weigh on production volumes for other European countries like Austria, Spain, Ireland and Italy. The Eurozone manufacturing PMI remained below the crucial 50.0 no-change mark, falling to a three-month low of 47.6, from 47.7 in May.

• Inflation in Europe remains weak at 1.2%, well below the ECB’s target. Employment conditions remain strong as Germany, France, Ireland and Italy continue to add jobs. Especially in the services industry. Unemployment rate for the Euro Area is at an 11 year low at 7.5%.

• Christine Lagarde, who is the IMF’s head and France’s former finance minister, is now a nominee for the next ECB president. Lagarde is a heavy favourite and markets have reacted positively to the news.

• Outlook for the Eurozone still remains unclear as external uncertainties persist; this includes geopolitical risks, including Brexit uncertainty and trade disputes with the US. Overall we are neutral on EU risk assets.

The Eurozone services PMI remained above the 50 level mark in expansion territory as France saw the fastest increase in new business orders solid employment growth.

Germany’s manufacturing PMI remained in contraction territory at 45.0 in June.

Eurozone services PMI

Germany Manufacturing PMI

9

Charts Source: Mazars Calculations

JAPAN AND EMERGING MARKETS

• Both Japanese and Emerging Markets saw positive returns in June. Emerging Markets rallied 5.7% while Japan returned 2.7% in GBP terms; the laggard of the developed markets. The Japanese services sector continues to grow at a healthy pace, with the headline Services PMI figure up from 51.7 previously to 51.9. Business confidence remains in line with the year-to-date average and for the third month in a row backlogs built up, indicating greater demand for work. On the other hand, manufacturing data suggests a far weaker economic picture. The Japan Manufacturing PMI was down from 49.8 to 49.3, with output and new work falling at the fastest rate since March.

• The BOJ has kept to its ultra-accommodative monetary policy stance as inflation has not picked up significantly. Interestingly, The Bank of Japan is now a top 10 shareholder in 50% of all Japanese companies; a testament to the scale of its ETF purchase programme.

• Whenever we discuss China, we inevitably must discuss trade. After the G20 summit Trump and Xi have agreed to continue talks, and for now existing tariffs remain in place. Trump also lifted the ban on Huawei doing business with US firms, which was an unexpected concession which has helped boost appetite for risk assets globally. Numerous hardware firms rallied on the news, with Micron shares up over 4% on the Monday after the summit.

• The China Manufacturing PMI fell sharply in June from 50.2 to 49.4, entering into the contractionary zone. The data shows a renewed reduction in export sales, with companies reducing headcount and making fewer purchases of raw materials. Industrial Production figures released mid-June were the weakest observed since 2002. While retail sales growth rebounded slightly in June, from 7.2% to 8.6%, the multi-year downward trend still remains. In the near term, with trade issues still unresolved, we expect a continued slowdown in the economic fundamentals however, the demographics of China still present great long term investment opportunities.

Japan Manufacturing PMI continues its descent

China Manufacturing PMI drops below 50 mark

Japan Manufacturing PMI

China Manufacturing PMI

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OUR THEMES

Charts Source: OECD

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MACRO THEME 1: GLOBAL GROWTH SLOWS

The pace and appetite for large investments has significantly slowed down over the past few quarters.

• Dollar repatriation. The US stimulus last year had a negative effect in emerging economies. Dollar repatriation incentives moved investments back to the US, mainly at the expense of emerging markets which, after two years, now see negative fixed investments (ex China and India, see chart)

• The Chinese rebalancing. China is the world’s marginal buyer. Its economic transition away from manufacturing and exports and internal deleveraging, exacerbated by trade disputes with the US, has dented demand for imports, which has reverberated across the other global economies.

• The Fed. The Federal Reserve maintained a mildly hawkish stance for 2018, which was reversed after a 20% fall in global equities late last year. Given that this expansion cycle has been inextricably liked to the Fed’s policy, it is natural that big investment decisions were deferred until more clarity was obtained.

What does it all mean for investors? Portfolio holders should distinguish between economic performance and stock markets. Markets move more along the lines of earnings. Even when the growth slowdown is so broad-based that it would affect sales across the world, profits may still come from cost cuts and new efficiencies unrelated to the cycle. Some companies, either because of their business model or their management, may even be impervious to an economic slowdown. It’s a time for careful security picking, but not a time to throw in the towel.

Markets often say that “expansions do not die of old age, they are killed by policy decisions”. However, at the risk of using words that may come and haunt us, “this time (may be) different”. The reason is that global central banks continue to be very accommodative but growth continues to slow. In fact, while throughout the cycle monetary conditions have remained very loose by historical standards, growth did not significantly pick up until 2016. It peaked at the end of 2017 and then started falling again. We believe this is happening for a number of reasons:

• The end of the “Trump Bump”. US growth expectations peaked even ahead of Mr. Trump’s decision to stimulate the American economy with tax cuts. Thus companies started spending on development, inventories and staff. Now, one year after the tax cuts, the effect has fizzled out. The return of political gridlock, with Democrats now holding the House Of Representatives and the diminishing of hopes for a bipartisan $1tr infrastructure Bill, have reduced willingness to invest over the longer term.

Investors should distinguish between economic performance and stock markets. Markets move more along the lines of earnings.

George Lagarias Senior Economist

“ “G20 fixed investment

Charts Source: CB Insights

12

MACRO THEME 2: CENTRAL BANK SPOTLIGHT

Can the Fed keep up with markets?

• Their power is not compatible with democratic mandates. In their efforts to shore up the financial system, central banks have taken decisions which hurt savers and put more risk on retirees. Lower structural growth and rising inequalities (exacerbated by central banks printing money mainly for the benefit of holders of financial assets- usually the wealthiest part of the population) have brought populist politics into the mainstream. Populist politicians, elected with a mandate to shake the status quo, target central bankers. As long as inflation is in check they can demand low rates to keep their economy competitive. Lack of a strategic, cooperative and long term perspective means that they can attempt to curb central banker’s attempts to avoid overheating of the economy. This is why candidates with a political background, rather than economists, are now chosen as the heads of the world’s largest central banks. The Fed’s Jay Powell and the ECB’s -nominated- Christine Lagarde are politicians, more prone to serve political ends and balances, rather than try to avoid an overheating economy. The decade-old safety net of central banks may now be in peril. The risk is clear. Whereas in the wake of 2008 central bankers communicated to curb systemic risks, those more susceptible to please politicians and markets, could exacerbate nationalistic and economic mercantilism, even trigger currency wars.

• In the past few decades, one of the policy decisions that were key for investors was central bank independence. In the past, central banks constituted the arm of the Treasury. Run by top notch economists, their ability to review economic conditions independently has given them the power to reduce economic volatility by making sure that the economy did not overheat, and subsequently a crash could be avoided. After 2008, their role in the global economy became paramount, especially when they circumvented political gridlock and printed an unprecedented amount of money to shore up the financial system. For the past decade they have been the custodians and underwriters of economic stability and growth, as well as architects of one of the longest, most impressive and correlated risk asset rallies in history

• It would not be an exaggeration to say that investors have looked to the central banks much more than fundamentals for well over a decade. However, this status quo is now coming under threat.

The decade-old safety net of central banks may now be in peril.

George Lagarias, Senior Economist

“

“

13

Charts Source: Mazars calculations

MACRO THEME 3: THE BREXIT CONUNDRUM (REDUX)

• Some times, decisions in history are difficult to analyse ex ante, especially when time has passed. Brexit might perplex future analysts regarding the causes and the decisions made, as much as it perplexes contemporary observers. While the mid-term stakes are perfectly clear from an economic standpoint, the decision making process is wrought with ideology, sentiment and the prevailing political winds, which are very difficult to analyse. This is why, six months ago, we came up with an internal model to gauge the different paths that Brexit might take. We came up with no less than 156 scenarios and more than 30 different input assumptions. After the last European election and the resignation of Theresa May we felt it was time to update those scenarios.

• First, we removed scenarios which included a Theresa May –brokered solution. This had the result of strengthening the more extreme scenarios on both ends, i.e. a hard Brexit (53%) or a soft or No Brexit (47%).

• We now believe that there’s an 80% probability that Tory leadership will become more staunchly Brexiteer than previously.

• We reduced the probabilities of a Labour government going forward, as the strong polling of the Liberal Democrats suggests that the they may rally Remainers more easily than Labour.

• We still believe that the current Parliament leans towards “soft” or no Brexit, however some fatigue is now obvious. We don’t believe that the next parliament will be much different. Despite headlines and the Brexit Party’s victory, Anti-Brexit voting was actually higher than overall Brexit voting, which we assume would play out in a general election, even in a first-past-the-post system.

• What does this probability shift mean for investors? Two things: First, that Brexit has defined politics so much, that the possibility of a new political order in Britain, represented by the Brexit party and Liberal Democrats should merit consideration. The very least it will force mainstream parties into a clear stance. Second, that portfolios should be prepared for volatility, as we now see less middle-of-the-road scenarios. For the time being, the risk asset “needle” is in the middle, but it can move either way very quickly as more extreme scenarios may materialise.

Our internal probabilistic model suggests that probabilities for a “Hard Brexit” are climbing.

For the time being, the risk asset 'needle' is in the middle, but it can move either way very quickly as more extreme scenarios may materialise.

David Baker Chief Investment Officer

“ “Overall Scenario Distribution

14

Charts Source: ICE BofAML Credit Indices

FIXED INCOME SPOTLIGHT: SHIFT IN THE YIELD CURVE

• Bond yields curves, especially the US one, have shifted down over the past few days. Such shifts are generally rare. This is because central banks became more dovish about long and short term interest rates. This means that bond prices have rallied across the board, and that market expectations for rates going forward have shifted downwards

• This, up to a point, is good news for investors already holding those bonds. However, it makes it more difficult for those who want to invest now, or for funds who want an extra yield to find it, as they would have to increase maturity significantly. An investor who wanted a 2.5% yield, could get it with a seven year Treasury bond 90 days

ago. Now for the same yield they would have to buy a 30 year bond. Alternatively, to find a yield, they would have to either increase leverage or search for equities or high yield / high risk bonds.

• The risk is also for bond holders who might not want to hold a bond to maturity. If the Federal Reserve ends up disappointing markets ( a likely event) then the curve might shift up again, erasing some of the profits for bond holders.

• Our weight in bonds remains low, since we believe the asset class does not fully compensate investors for the risks they are taking.

15

EQUITY SPOTLIGHT: DISPARATE EMERGING MARKET RETURNS

• The chart below shows the range of returns across top nine countries in the MSCI Emerging Markets index by market capitalisation. Combined they make up 88.6% of the index as of the end of March. The vast majority of emerging market equity funds use this as their benchmark. The largest constituent in the EM index is China, at 33%. In contrast global equity indices tend to have a weighting of around 60% to the largest constituent, the US.

• Some equity funds purposefully maintain geographic weightings in line with index weightings to avoid the issue that, especially in times of crisis for a particular country, virtually all equities are likely to sell-off regardless of underlying firm fundamentals.

• However most funds do not do this, with differing methods for allocating assets between geographies. Some funds are 100% ‘bottom-up’, investing solely based on their view of relative fundamental strength of companies. Others may be 100% ‘top-down’, investing solely based on their view of the outlook for each country’s equity market. Most funds are somewhere in between.

• For global equity funds which don’t match country index weightings the biggest asset allocation decision is whether to be under or over-weight US equities. Although a difficult decision it is largely binary, and not something a fund

manager will need to spend a significant amount of time considering. Further, as the index weighting is dominated by developed nations, there is less concern about being overweight in a country where there could be a crisis, so that dispersion of returns is generally much more muted.

• By contrast for EM equity funds which don’t match country index weightings have the issue that there is a much higher likelihood of a crisis for a significant index member. Also, while China is easily the largest country by market capitalisation, it does not dominate returns in the way the US does in global indices, increasing the amount of time needed to decide on regional allocation. And unlike the US, which is widely regarded as one of the most stable economies in the world with a well developed rule of law, there are many concerns about the stability of the Chinese economy as well as corporate governance. As such many EM funds are nervous about allocating any assets to the region.

• From our analysis we believe it is extremely difficult to determine which countries within EM are likely to over and under-perform in both the short and long-run. As such it becomes a toss-up whether geographic allocation decisions add or detract value. For now we are investing our EM exposure in passive funds in order to remove the risk of underperformance from geographic return dispersion.

Charts Source: Mazars Calculations

2018 Returns in Sterling terms

16

EQUITY SPOTLIGHT: STILL AN OPPORTUNITY?

• According to data from the Financial Times and Bloomberg, investors have withdrawn more than £20bn from UK equity funds since the Brexit referendum. The number dwarves the £4bn estimated net inflows from ETFs during the same period.

• Outflows from funds and inflows from ETFs suggest that the “slow money” is moving away from UK equities, leaving more room for speculative investors. The main characteristic of the latter is that they are likely to withdraw quickly, either following very good or very bad returns. Conversely, the former is invested for the long run and tends to add to stability.

• Currently valuations are below average, discounting significant risk despite the fact that UK large-caps only get a third of their earnings from the UK economy.

• In recent times we slightly increased our weight in Sterling ( to which we had a long standing underweight) and took our profits from the position, in fear that a protracted Brexit could end up being no Brexit at all. This would be economically and market positive, but it could hurt our portfolios versus the benchmark. In the last investment committee, following the developments in the Tory Party, we revised our probabilities for a Hard Brexit significantly upwards. We thus reversed that move partly, moving away from UK small caps and into US and Japanese equities, to make sure portfolios are more protected against the probability of a disorderly Brexit.

£1bn

UK all share vs MSCI World CC

www.mazars.co.uk

Contact us

T: +44 (0)20 7063 4000 E: wealth.management@mazars.co.uk

Investment teamDavid Baker - Chief Investment Officer E: david.baker@mazars.co.uk

George Lagarias - Senior Economist E: george.lagarias@mazars.co.uk

James Rowlinson - Investment Analyst E: james.rowlinson@mazars.co.uk

Prerna Bhalla - Investment Analyst E: prerna.bhalla@mazars.co.uk

Daniel Gorringe - Investment Analyst E: daniel.gorringe@mazars.co.uk

Stephanie Georgiou - Operations E: stephanie.georgiou@mazars.co.uk

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For watchers of “The Good Place” this week’s commentwill not be a surprise: The world has become so complexthat no decision is simple in terms of repercussions. Inlast week’s IMF economic outlook it was suggested that itwas not Mr. Trump’s tariff threats, but rather his decisionto boost the US economy at a time when it was alreadystrong that may have upset the global trade cycle lastyear, sending global exporters to a standstill. The notionis interesting. Owning the global reserve currency andbeing the unofficial leader of NATO, the US is oftenrequired to think globally. It is expected to share growthwith the rest of the world and consider global economicconditions before it raises interest rates or cuts taxes.When Barack Obama intervened in Syria, Europe wasfaced with millions migrants to the extent that Italy electeda government that vowed to sink migrant boats. Whatdoes this all mean for investors? For one, the US cannotbe expected not to mind its own interests for the sake ofinternational balances. Thus, the more complex the worldbecomes, the more political and economic volatility weshould expect. When considering elections, investorsshould be forewarned that people vote with much simpler,and usually identity related criteria, rather thaneconomists think is rational. Secondly investors have sofar been wondering what the impact of Brexit will be inBritain, blithely assuming that it is a local matter, likelyreflecting an inability to process third and fourth orderrepercussions. Has it been priced in that a 10% cut in theEuropean budget will have serious implications in thecontinent’s emerging nations, many of which rely on EUmoney to carry out infrastructure projects? Has Europe’sloss of status as the world’s largest collective economybeen priced in? What will the disruption do to itsrelationship with America? Will economic volatility putmore strain on the Euro, thus risking setting off the largestglobal economic grenade of our time, the dissolution ofthe common currency?

• US nonfarm payrolls increased 196K and the unemployment rate was unchanged at 3.8%. The participation rate was little changed at 63.0%. Over the last 12 months average hourly earnings have increased by 3.2%.

• German manufacturing fell -4.2% MoM in February, missing estimates for a gain of +0.5% by a large margin. Order volumes are down -8.4% YoY, with a drop in foreign demand blamed for the slowdown.

• President Trump announced that an ‘epic’ trade deal with China may be close on Thursday, having found agreement on some of the toughest points, and that a deal could come in the next four weeks.

-1.1%

Wealth Management Weekly Market UpdatePublished 8 April 2019

Market Update

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Important informationAll sources: Bloomberg. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided Mazars Financial Planning Ltd accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.Mazars Financial Planning Ltd is a wholly owned subsidiary of Mazars LLP, the UK firm of Mazars, an integrated international advisory and accountancy organisation. Mazars Financial Planning Ltd is registered in England and Wales No 3172233 with its registered office at Tower Bridge House, St Katharine’s Way, London E1W 1DD. Mazars Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.

© Mazars 2018

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David Baker, CIO

The US added almost 200K new jobs in March, slightly exceeding expectations and sending equity indices higher at the end of last week.

View From the

Desk

all returns in GBP

Source: Markit

%

Global equity markets saw a second consecutive week of positive performance, with US equities moving within 2% oftheir highs. Markets have ben in a positive mood since the Fed became more dovish early in the year, with positivesigns on trade talks between the US and China a further catalyst for gains last week. UK and Emerging Market equitieswere the standout performers last week, both up +2.4%, while European equities were also up +2.3%. US andJapanese equities were up +1.9% and +1.1% respectively. Financials continues to be the worst performing sectordespite a slight pick up in global yields. UK 10Y Gilt yields rose +11.6bps and US 10Y Treasury yields were up+9.0bps. Sterling was flat vs the US Dollar and the Euro, and up +0.8% vs the Yen. In US Dollar terms Gold was flat,while Oil continued its recovery, up +4.9%.

Global StocksUK Stocks US Stocks EU Stocks EM Stocks Gilts GBP/USD

+1.9% +2.3% +1.9% +2.4% +0.0%

Fig.1: World Economy Challenged

Markit PMI numbers suggest that global manufacturing remains challenged, while the services sector has shown signs of improvement.

Fig.2: US Payrolls

Probability of a Fed Rate Cut in 2019

56%

The Week Ahead

• The FOMC will meet on Wednesday to decide US monetary policy. No changes are expected at this meeting although a rate cut before the end of the year has a 56% probability according to futures markets.

(prev. 64%)

Source: BLS

49

50

51

52

53

54

55

Apr-16 Apr-17 Apr-18

Global Services PMI

Global Manufacturing PMI

US Payrolls (LHS)US Wage Earnings

YoY (RHS)

The market’s change of mood was largely attributable to the US Federal Reserve’s shift away from raising interest rates, and its indication that it would be “patient” in its approach to monetary policy. ”

“

MAZARS WEALTH MANAGEMENT INVESTMENT NEWSLETTERSpring 2019

Global stock markets regained their poise in the first three months of the year returning just under 10% in Sterling terms, and nearly recouping the losses from the final quarter of 2018. These gains were delivered despite continued

concerns about economic growth which brought about a fall in sovereign bond yields and caused Gilts to rise by over 3% during the period. The market’s change of mood was largely attributable to the US Federal Reserve’s shift away from raising interest rates, and its indication that it would be “patient” in its approach to monetary policy. Thus it appears we are returning to a situation where interest rates may remain very low by historical standards for the foreseeable future, and with lots of money chasing few attractive investment opportunities (yields on safer assets remain very low) stock markets remain buoyant despite predictions of a forthcoming recession.

Leading indicators of economic growth continue to cast a gloomy shadow over the prospects for equities. Manufacturing Purchasing Managers Indices, which usually serve as a reliable indicator for future growth, fell significantly compared to the same measures from six months previous, and into contraction territory. We do however note that valuations on equity markets are no longer at the elevated levels seen over the last

few years, and hence it may be argued that much of the bad news is already priced into markets.

At the time of writing (and most likely at the time of reading too!) the Brexit debacle trundles on towards no apparent resolution. Politics aside, markets do not seem to be in the mood to predict an outcome, with speculation on Sterling subdued, and foreign investors simply choosing to ignore the UK listed market until matters become clearer. The eventual outcome is highly significant in the short term for Sterling based investors, not least because the market is likely to deliver its verdict through its valuation of the Pound.

Our Investment Committee agreed to maintain our cautious stance reflected by our neutral position in equities and overweight position in gold. As Brexit and the value of Sterling continues to be a risk for UK investors, we implemented changes to protect our portfolios against a possible rise in the value of the Pound, and reinstated our exposure to domestically focused UK companies.

I hope you will find this newsletter interesting and relevant to you, and I would very much welcome any feedback you may have. Please do feel free to get in touch with your thoughts either by phone on 020 7063 4259, or by email on david.baker@mazars.co.uk.

CHINA DOLLECONOMIC OUTLOOK Q2 2019

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Chart Sources: Bloomberg. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided Mazars Financial Planning Ltd accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.

Mazars Wealth Management is a trading name of Mazars Financial Planning Ltd. Mazars Financial Planning Ltd is a wholly owned subsidiary of Mazars LLP, the UK firm of Mazars, an integrated international advisory and accountancy organisation. Mazars Financial Planning Ltd is registered in England and Wales No 3172233 with its registered office at Tower Bridge House, St Katharine’s Way, London E1W 1DD. Mazars Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.

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