The Janus Henderson Global Snapshot explores the themes driving markets, the trends to watch, market returns and metrics, and the Multi-Asset Team’s outlook for regions and sectors at quarter end.
Policy easing stepped up as economic weakness extends
The Federal Reserve's Open Market Committee cut the Fed funds target by half a percentage point during Q3 but members were divided on the prospect of a further reduction. Core inflation rose to 1.8% in August, a seven-month high.
The People's Bank of China left interest rates unchanged but lowered reserve requirements while introducing a new benchmark for bank lending rates. Caution reflects concern about excessive credit, currency weakness and a food-driven inflation spike.
Target inflation fell to 0.5% in August, below a median forecast of Bank of Japan policymakers - adjusted for tax effects - of 0.8% in 2019-20. The Bank signalled a likely October policy ease focused on lowering short-to-medium term interest rates.
German industrial woes
Germany's manufacturing purchasing managers' index slumped to a 10-year low, undershooting indicies in neighbouring countries. The European Central Bank cut the deposit rate by 10 basis points and relaunched asset purchases at €20 billion per month.
A corrected treatment of student loans triggered a larger-than-expected upward revision to the fiscal deficit, which is on course to exceed the 2% of GDP target. Chancellor Javid nevertheless announced the largest spending rise for 15 years in autumn review.
Indian / Brazilian policies
The Indian government responded to economic weakness with a surprise corporate tax cut package worth 0.7% of GDP. Brazil's pension reform bill made progress through Congress but investors worried that measures would be watered down, reducing fiscal savings.
Trends to watch:
Weak labour market
Employment indices in the Institute for Supply Management’s manufacturing and non-manufacturing surveys fell to their lowest since 2014-16 in September. A rise in unemployment would add to pressure for rate cuts and a trade truce with China.
Stable net exports
Additional US tariffs may sustain export weakness but the economic hit may continue to be limited by a cut-back in imports. A weak currency is cushioning the competitiveness loss, with the trade-weighted exchange rate at a five-year low.
The government is hoping that offsetting fiscal easing measures will contain the negative economic impact of the October sales tax hike. Ominously, consumer confidence has fallen below its low before the last hike in 2014, when GDP slumped.
Money stock measures have accelerated, with corporate liquidity surging. The leading relationship with economic activity suggests that purchasing managers’ indices will bottom out soon and recover into 2020, assuming no new negative shock from tariff wars and / or Brexit.
Early rate cut
Business confidence has slumped to an extent always associated with monetary policy easing historically. With inflation below-target and labour market data softening, a November rate cut is possible even in the event of a Brexit deal or further delay.
A GDP-weighted average of short-term interest rates in seven large emerging economies has fallen to a nine-year low. Cuts are expected in Q4 in 19 of the 26 constituent countries of the MSCI EM equity market index.
Source: Janus Henderson Investors at 30 September 2019. These comments are the views of Simon Ward, Economic Adviser, and should not be construed as investment advice. These views may differ from those of other Janus Henderson fund managers.
KEY MARKET DATA
|Equity market returns for Q3 2019 (%)||Qtr local currency||YTD local currency||Qtr sterling||YTD sterling||Qtr dollar||YTD dollar|
|US S&P 500||1.19||18.74||4.51||22.72||1.19||18.74|
|Euro area: Euro Stoxx||2.23||16.96||1.08||15.29||-2.13||11.55|
|UK: FTSE All Share||0.12||10.52||0.12||10.52||-3.06||6.94|
|MSCI Far East ex Japan (US$)||-||-||-2.2||7.32||-5.31||3.84|
|MSCI Emerging Markets (US$)||-||-||-1.99||7.12||-5.11||3.65|
Source: Refinitiv Datastream, Janus Henderson Investors, index price returns, as at 30 September 2019.
Euro area: EU member states using euro currency (currently 19)
Asia: China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, Vietnam
BRICs: Brazil, Russia, India, China
World: G10, Eastern Europe & Africa, Asia, Latin America, Middle East.
|Forecast P/E 2019||Forecast P/E 2020||Forecast EPS growth 2019 (%)||Forecast EPS growth 2020 (%)|
Source: Refinitiv Datastream, Janus Henderson Investors' calculations, and IBES (institutional Brokers' Estimates System) estimates for MSCI Indices as at 30 September 2019. Forecast EPS (earnings per share), Forecast P/E (price-to-earnings ratio).
|Consensus GDP growth forecasts (%)||2019||2020||2021|
Source: Bloomberg, economic forecasts, as at 4 October 2019. Forecast GDP = real gross domestic product.
|Consensus inflation growth forecasts (%)||2019||2020||2021|
Source: Bloomberg, economic forecasts, as at 4 October 2019. Forecast CPI = consumer price index.
|Bonds (%)||30 Sep 2019 yield||Qtr return %||YTD return %|
|US 10-year Treasury||1.67||3.28||9.68|
|Japan 10-year government bonds||-0.22||0.62||2.43|
|Germany 10-year bund||-0.57||2.7||8.93|
|UK 10-year gilts||0.4||3.55||7.34|
|Corporate bonds: (Barclays Global Aggregate Corporate Index $)||-||1.47||7.92|
|High yield: (Merrill Lynch Global High Yield $)||-||0.41||9.99|
|Emerging market debt (JPM Global Emerging Markets Debt $)||-||1.34||12.08|
Source: Refinitiv Datastream, Janus Henderson Investors, as at 30 September 2019.
|Currencies and commodities||30 Sep 2019||Qtr change %||YTD change %|
|S&P GSCI Total Return Index $||-||-4.18||8.61|
|Brent oil ($/barrel)||-||-8.94||14.61|
|Gold bullion ($/Troy oz)||-||4.36||15.02|
The above data is intended for illustration purposes only and is not indicative of the historical or future performance or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.
Please note the below are the views of the UK-based Janus Henderson Multi-Asset Team at quarter end. They do not represent a Janus Henderson house view or the views of individual fund managers and should not be construed as investment advice.
Positive Neutral Negative
|Global corporate||Strong returns but tight spreads and expensive valuations make the outlook challenging, with limited compensation for additional risk over sovereign bonds.|
|UK gilts||Slowing macro data and political issues hint at challenges facing the UK, with scope for further declines in yields despite low starting point.|
|Global sovereign||Diversification benefits in risk off bouts remain the holding rationale, but rate cuts are fully priced in and long-term return expectations are low.|
|Emerging market debt||Country-specific risks remain a headwind but tempering dollar strength and attractive spreads are relatively attractive versus other bonds.|
|High yield||Performance in 2019 has been positive but hindered by low interest rate duration. Defaults remain low but we favour short-dated exposures.|
|UK||Brexit and GBP moves dominate the short term but competitive dividends and negative sentiment indicate potential for value with a long horizon.|
|Europe||Relative valuation case versus other regions but economically sensitive market vulnerable to extension of building global macro lethargy.|
|US||Extended valuation can persist after but as volatility builds and market levels appear vulnerable there are better opportunities in other regions.|
|Japan||Trade war developments affect this cyclical region but Japan has started to make up some lost ground YTD and delivers differentiated return profile.|
|Asia||Trade war headlines and issues around Chinese growth are negative, although valuations are not stretched, hence the neutral stance.|
|Global emerging markets||Trade war headlines and issues around Chinese growth are negative, although valuations are not stretched, hence the neutral stance.|
|£/$||Brexit-related volatility plagues the UK and sentiment towards GBP is consistently negative, however strong USD is not favoured by the US.|
|£/€||Political developments seem likely to continue to drive headlines and
market moves on both sides of the Channel.
|£/¥||No outright view given Brexit hysteria but JPY offers safe-haven status in a world of positive correlations across most asset classes.|
|Property||Falling yields should help returns but valuations and positioning appears crowded. However, yields remain higher than many asset classes.|
|Gold||Gold is a useful hedge to hold as markets become more volatile.
Returns have improved as investors seek quality and protection.
|Oil||Significant volatility in 2019 has reflected a slowing macro backdrop and political noise, but in reality prices have been relatively stable.
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