02/10/19October 2019 Investment & Economic Update

October 2019 Investment & Economic Update

In our latest monthly investment update for October 2019, we take a look at how the global investment markets, economy and commodities are performing.

The FTSE 100 index of leading UK company shares closed at the end of September at 7,408.20, recording a decent gain of 2.8% during the month. It was the second consecutive month of gains for the index, continuing its reverse of two months of falls.

As we head into the final quarter of the year, European companies are expected to endure their worst quarterly earnings since the start of last year. According to data firm Refinitiv, the firms that make up the Euro Stoxx 600 index are expected to report a 2.2% fall in third-quarter earnings per share.

This European malaise reflects a broader global economic slowdown, driven by the ongoing US-China trade war and Brexit uncertainty. Germany, the largest economy in Europe, is on the brink of recession, after its GDP shrunk by 0.1% in the second quarter.

In response to the global economic slowdown, the European Central Bank (ECB) cut its key interest rates last month, for the first time since early 2016. It also plans to restart its controversial asset-purchasing programme from next month, in an attempt to boost the eurozone’s struggling economy.

Factory falls

In the UK, factory production saw a fifth consecutive month of falls in September. According to the IHS Markit and the Chartered Institute of Procurement & Supply (CIPS) purchasing managers’ index (PMI), production fell to a reading of 48.3 in September. An index reading below 50 indicates contraction. It was, however, up slightly on the index reading of 47.4 in August.

It’s the first time since the height of the global financial crisis that UK factories have reported five consecutive months of output decline.

There’s a similar picture across the eurozone, where manufacturing contracted last month at its sharpest rate in 7 years. The headline reading for the eurozone fell to 45.7, to reach its lowest level since October 2012.

Rob Dobson, director at IHS Markit, said: “The UK manufacturing downturn continued in September, adding to signs that the sector may be sliding into recession. Output, new orders and employment all fell further as rising political, trade and economic uncertainties exacerbated concerns about Brexit.”

Global slowdown

Globally, the World Trade Organisation (WTO) has cut by more than half its forecast for growth in 2019. The agency also issued a stark warning that the global economic slowdown could hit living standards and jobs.

According to the WTO, trade volumes are expected to grow by 1.2% in 2019, down from its previous forecast in April of 2.6%. Global economic growth is forecast to be 2.3% this year, down from an earlier estimate of 2.6%.

The WTO pinned the blame for this downgrade on slower growth in major economies, trade wars between major trading partners, and continued Brexit uncertainty.

Low inflation

UK price inflation in September fell to 1.7%, its lowest rate in nearly three years. The Consumer Prices Index (CPI) measure of price inflation fell in the year to August from 2.1% the month before, resulting in the lowest inflation rate since December 2016.

It was the biggest one-month drop in the rate of price inflation since late 2014, with economists warning the economic slowdown and Brexit uncertainty could have deterred businesses from raising their prices.

The Bank of England’s Monetary Policy Committee kept interest rates on hold at 0.75% in September, as widely expected by economists. The Bank did, however, comment that an interest rate was now more likely due to continued Brexit uncertainty and a slowdown in global economic growth.

The Bank said that Brexit uncertainty risked becoming entrenched, resulting in a weaker outlook for the UK which would necessitate an interest rate cut. With weaker global growth, domestically generated inflationary pressures could be reduced, leading to a rate cut.

House prices

Another consequence of this entrenched Brexit uncertainty was an unexpected fall in UK house prices last month. The latest Nationwide survey shows prices falling in September by 0.2%. It means the average property price is now £215,352, down from £216,096 a month earlier.

Howard Archer, the chief economic adviser to the EY Item Club, said: “With the economy largely struggling and the outlook highly uncertain, we suspect that house prices will remain soft in the near term at least.”

House prices fell most sharply in London and the South East of England, down by 1.7% in the capital on an annual basis. Elsewhere in the country, house prices continued to rise, albeit more slowly than before.

Oil prices weakened at the start of the month, with weak US economic data reducing demand outlook. Reports of an output decline from the biggest oil-producing nations helped to keep prices from falling further. Brent Crude Futures fell to $58.76 a barrel at the start of October.

The benchmark 10-year government bond (gilt) is yielding at 0.51% at the start of October, up slightly on a month earlier.

£1 currently buys $1.2270 or €1.1246. The Forex Gold Index is $1,466.10/oz, and the Silver Index is $17.25/oz.

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