People may have been on holiday, but the summer wasn’t quiet. In the UK, Brexit dominated headlines: despite being just six months away, the shape of the outcome hasn’t become any clearer. While Brexit continued to overshadow news about the economy, it did perform marginally better than the grim forecasts. In particular, although employment figures have been good and economic growth hasn’t slowed quite as much as expected, wage growth remained hard to detect.
The eurozone has done better but also remains a mixed bag, with Germany slowing and Italy again in political upheaval. Everywhere bar aging Italy is doing better than the UK.
The same could be said of the US, but it’s important to consider the effect of ten years of higher stimulus and an economically unorthodox government, and how this may have separated the path of the US economy from other developed markets. Tightening monetary policy, loosening fiscal policy and protectionism in trade makes the situation look quite different from its peers. At the moment, there are signs to encourage all views. There was much momentum behind the good news, while the concerns raised by the change of direction won’t be expected to show their full effect immediately.
The term ‘emerging markets’ groups together countries with completely different stories, but that all face a headwind of disruption from a strengthening and tightening dollar and aggressive trade restrictions. Relatively weak growth in Asia and trouble elsewhere means there is less resilience within the group. Overall, the moment of strong and synchronised growth seems to have been quite brief and disappointingly lacking in self-reinforcement.
US markets have, for better or worse, broken with the rest of the world. Interest rates have sustained a rise. Rates have risen elsewhere but much less than in the US. US equities also struck out on their own, apparently losing their correlation with the rest of the world. The recent crash showed there is still a link, but the US is in a very different place at the moment.
European stocks, including the UK, trod water over the quarter. Japan followed a similar pattern but managed to keep edging up and, despite following a very different path, almost caught up with the US. Emerging markets did badly in a quarter when the headwinds described above appear to have made themselves felt.
Higher rates mean higher expectations all round. Equity prices and expectations appear to have kept up with each other - with the possible exception of the UK, where performance has perhaps been weaker than justified. On balance, that appears reasonable but all attempts to understand UK expectations must take note of Brexit. We assume that the foreign earnings of UK-listed companies will provide some protection and forecasters are well aware of Brexit. But it remains a fast-moving situation with potential for the uncertainty to be resolved in a dramatic way.
In the meantime, there is plenty of scope for assessments to get out of sync. Property is even more susceptible to Brexit uncertainty than equities. A hard Brexit might slash demand and cause a collapse in rents and soon after, values. Alternatively, a weaker pound and resolved uncertainty might attract foreign investors. As it is, high prices meeting higher interest rates and weak rents mean that the outlook has fallen back on average.