The UK growth rate has been below the G7 average since the vote to leave

the EU in 2016, having previously been above.

The uncertainty created has hit business investment and with the

Government now preparing the country for a hard exit in March, many will

put off major purchases.

The market backdrop for the second half of the year feels quite different to

what we have seen up until now.

The main change has been the reversal of the focus on growth and momentum

stocks with an end to the buyers strike on value and income names.

This is not just a UK phenomenon but we are now starting to see investors

carefully assess the price they pay for growth in the market.

This is normal during more volatile economic times and the disconnect

between growth and income/value stocks is something we covered in the

last edition of FundWatch.

Some of the cyclical areas of the UK market have begun to turn a corner in

the second half of the year, demonstrated by good results from Cineworld,

John Laing, Wood Group and Dunelm.

The price earnings ratio (a stocks price relative to the company’s ability to

earn from that stock) for higher growth companies is the highest it has been

since the TMT bubble in 2000.

Throughout the world and particularly in the UK we have seen a marked

uptick in passive strategies. Passive strategies tend to chase performance of

areas that have historically done well and give these stocks an extra

inflationary boost for no other reason than they are big and going up. This

has created some pockets of extreme inflated valuation in the market and

these areas should be avoided at all cost.

Overview

UNITED KINGDOM

A pick up in volatility this year was something we havebeen expecting. The main reason for this is the earningssurprises of 2017. The flow of positive news leads toinvestor’s expectations being revised up for the following year. As these bars are set higher the risk ofdisappointment, however marginal, increases and assuch volatility follows.

The key factor has been a slowdown in global tradegrowth such that economies which rely heavily onexternal demand have seen activity slow.

The US stockmarket (S&P500) moved up and down bymore than 1% in a single day on ten occasions last month,two more times than the whole of 2017.

Tech stocks and cyclical sectors around the globe wereworst hit whilst Government Bonds provided only small

positive returns.

MarketWatchNovember 2018

Having synchronised in 2017, the major economies have moved out of step in 2018.

The US has continued to power ahead but growth elsewhere has been more lack lustre.

For the third quarter US real GDP expanded by a robust 3.5% annualised

whilst China and Europe cooled.

Source: Thomson Reuters Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 30 September 2018.

Source: Thomson Reuters Datastream, Schroders Economics Group, G0018. Data as of 23 October 2018.

Global trade to slow further

Exchange rate, GBPUSD: US dollars per pound; GBPEUR: euros per pound

1.8

1.7

1.6

1.5

1.4

1.3

1.2

1.1

1.0

‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18

Sterlingdepreciating

Brexit referendum

GBPUSD

GBPEUR

2011

6

5

4

3

2

1

0

-1

56

54

52

50

48

462011 2011 2011 2011 2011 2011 2011

World trade y/y% 3mma (left axis figures)

New export orders: Global PMI (right axis figures)

Sterling

UNITED STATES JAPAN

Japan has recently shown some signs of strength with a pick upin the purchasing manager’s index in October and capitalexpenditure intentions in the tankan and business outlook surveyhave been notably strong this year.

The economy is set to receive a fiscal boost in this quarter as therebuilding gets under way following the recent natural disasters.

Japanese growth is forecast to slow from 1.7% in 2017 to 1% in2018 and 2019 as inflation almost doubles to 0.9% owing to ahigher oil price.

During the summer months we saw the Bank of Japan make some

small tweaks to its monetary policy. We have had no guidance

from them since suggesting there will be no further change in the

immediate future.

The Japanese equity marketcontinued to be marked by strongmomentum of structural repairand above consensus profitgrowth, although continues to bevery exposed to changes in theglobal cycle.

Company profits have continuedto improve and the most recentquarterly results were broadly inline with expectation.

Investors concerns over thepossibility of higher US tariffs onautos dampened sentiment acrossthe entire auto supply chain butnear the end of September the USagreed to defer any decision untilafter current trade negotiationswith Japan.

The White House’s big tax cuts at the beginning of the year havepiled pressure on the Fed to undo this pro-cyclical fiscal stimulususing monetary policy. In other words, Trump’s tax cuts havepushed the Fed to hike rates more than they would haveotherwise liked to.

The Federal Reserve has indicated that policy rates are now atneutral but is showing little signs of the rate hike cycle beingover, suggesting we should expect further interest rate increasesfrom here.

There has also been de-escalation in the tensions between the US and its neighbours, Canada and Mexico. The North AmericanFree Trade Agreement was torn up but has now been salvaged in the form of the United States, Mexico and Canada Agreement (USMCA).

Caterpillar often seen as a global bellwether as they make almostall trucks and equipment needed to expand an economy, preachedcaution in its most recent statement, citing tariffs as the mainreason.

When combined with comments and somewhat disappointingquarterly results from Amazon and Alphabet (Google’s parentcompany) there is a sense that we have passed the peak forearnings growth.

Of the companies that have reported, 80% are beating earningsexpectations but only 46% are beating sales estimates. Whilst thisdown shift in sales is notable, it is actually in line with the averagesince 2012.

Profit margins appear to have grown to 12.1% in Q3 of 2018. This represents a two percentage point increase from a year agoand is the highest level of profit margins since 1990.

One of the leading sectors this reporting period has been energy.Energy companies are benefitting from oil prices which are 45%higher than a year ago and despite an uptick in investmentspending over the past few quarters, have shown restraint whenit comes to production.

Health care earnings have also been solid due to an increaseddemand for innovative technologies and therapies as well as arobust drug pipeline.

However, many of these companies have large internationalpressures and as a result have begun to feel the impact of astronger dollar.

Source: BEA, Dallas Fed, Kansas City Fed, New York Fed, Philadelphia Fed, Richmond Fed, Thomson Reuters Datastream, J.P. Morgan Asset Management.Capex intentions is an average index level of the five aforementioned fed districts equally weighted, displayed using a three-month moving average. Guide to the Markets - UK. Data as of 30 September 2018.

Source: METI

US future capex intentions and business investment

40

30

20

10

0

-10

-20

-30

120

110

100

90

80

70

60

300

250

200

150

100

50

0

Apr ‘08 Apr ‘10 Apr ‘12 Apr ‘14 Apr ‘16 Apr ‘18

20

10

0

-10

-20

‘01 ‘02 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18

< Future capex intentions

Industrial production

2010 = 100

Industrial robots

Business investment >

Index level

Industrialproduction

Industrialrobots

% change year on year

Japan industrial production & robots

EUROPE

September saw the biggest out flows from the IA Emerging Markets funds in a decade. That is over aperiod that has included Black Monday, the Chinese slowdownand the taper tantrum of 2013.

We believe the severity of investor’s reaction is overdone giventhe significant improvement in the macro conditions thanks to thewidespread closing of current account deficits and continuedstrength of corporate fundamentals.

The resilience in Emerging Markets trade growth has comespecifically from emerging Asia economies, where localconsumption growth and growing technology companies areproving more resilient.

For the Emerging Markets beyond China the strength of USdemand should have been a support for export growth.

Instead they have suffered from theeffect of higher US interest rates and astrong US dollar.

The result of investors being able toachieve high yields in less risky assets inthe US has drawn capital out ofemerging markets.

In certain cases such as Turkey andArgentina, this has led to a financialcrisis but for most the effect has been areduction in local liquidity, ie creditavailability, and has driven upborrowing costs.

It seems increasingly apparent thatChina plans to respond by shoring updomestic growth with additionalstimulus. Beijing is starting to increaseboth monetary and fiscal stimulus,which could prove helpful in limitingthe negative impact of rising global trade tension.

FAR EAST & EMERGING MARKETS

The Italian standoff has delivered a straightforward valuation shockin Europe this year. Specifically, the additional yield offered toinvestors to hold Italian Government Bonds in lieu of German orFrench equivalent Bonds has jumped to levels not seen since theEuropean Sovereign Debt crisis in 2011.

The judgement today is that cool heads will prevail in the standoffand that this European political risk will diminish. But the longer thestandoff continues, the more meaningful the drag on fundamentals.

Whilst the new Government’s economic policy appearsexpansionary for the Italians, a lack of clarity over how they will bepaid for means investors may face turbulent months ahead.

The only certainty so far about the economic impacts of their tax cutsand spending pledges enacted by Italy’s Government is that they willswell the country’s budget deficit in 2019.

Economic Minister Giovanni Tria has tried to reassure investors itwill be within the EU single currency rules even though he admits aslowdown in debt repayment.

Italy’s 2019 budget will focus on introducing a flat tax and universalbasic income, which will be introduced gradually over the legislatorsfive year life span.

In theory a flat tax and higher welfare payments should boostgrowth, but given the country’s high debt to GDP ratio of 129.75%,the positive impact could be offset in the short term by financialvolatility if they are paid for by deficit spending.

Currently Italy has five tax bands ranging from 23-43% and the planis to replace this with a flat rate of 15% for all self employed workersup to €100,000.

A pure flat tax would in theory boost economic growth and cut taxevasion. But the real world picture gleaned from the Baltic andEastern European countries where it was introduced after the fall ofthe Berlin wall is more mixed, according to the ECB study in 2007.

Within the market the manufacturing sector is struggling with neworders declining, possibly driven by the escalation in the US/Chinatrade wars.

Much of this weakness is coming from Germany in particular autosas new emission standards present short term challenges for producers.

At one stage the US was considering raising tariffs on auto importsfrom the EU but this has been shelved for now.

Survey results: Do you support the euro?

90

85

80

75

70

65

60

55

50

45

40

100

90

80

70

60

50

2013 2014 2015 2016 2017 2018

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Italy France Spain

QE taper begins

Germany

% answering “yes”

Eurobarometer survey, J.P. Morgan Asset Management. Past performance is not a reliable indicator ofcurrent and future results. Guide to the Markets - UK. Data as of 30 September 2018.

Source: Thomson Reuters Datastream, Schroders Economics Group. As at 23 October 2018.

Emerging Markets FX index and the Fed funds rate

Nov ‘13

Nov ‘16

Nov ‘17

Nov ‘18

JP Morgan EM FX index US Fed funds rate

JP Morgan Emerging Markets FX Index

US Fed funds rate

We have covered the UK property asset class in more detailin the latest edition of FundWatch. We continue to feel that itremains all about income at this stage in the cycle.

We have seen one key development in the UK space and that issome of the challenges being faced by landlords with retail tenantsbeing challenged by CVAs. This puts a tenant more in controlwhen it comes to rental negotiations and is something we will haveto play close attention to moving forwards.

When it comes to our global strategy we have seen an additionalfactor added to their global cities analysis. That is the presence ofuniversities. The team has identified that an important part of athriving city is a world class university and this is something they

are now formally including in their analysis.

US Government Bond yields continued higher in October.Economic data remained positive and stronger than in otherregions, while Fed Chair Jerome Powell indicated there remainssignificant scope for further rate hikes. Ten-year yields increasedfrom 3.06% to 3.15% and the two-year yield from 2.82% to 2.87%.

Outside of the US it was a picture of concern. We saw the concernsaround Italy being one of the main drivers of the European Bond market.

Likewise, with a number of emerging market currencies strugglingin the face of a strong dollar with the bond return profile for the

asset class being negative over the period.

IMPORTANT  NOTICE

The content of this newsletter is for information purposes only, it is not intended to be used to make investment decisions. We cannot accept any responsibility for any financial loss incurred as a result of anyone acting upon this information. Anycomments we make regarding taxation are based on our understanding of current tax and HMRC legislation, which oftenchange. Past performance is not necessarily a guide to the future and the value of investments can go down as well as up andyou might get back less than you have paid in. Taking any pension benefits early can reduce the income you will receive laterin life. Income drawdown is not suitable for everyone and advice must be sought before making any decisions.

Churchill Investments plc is authorised and regulated by The Financial Conduct Authority

It could be argued that prospects for

a re-synchronisation of global growth

depend on whether global trade will

pick up.

At this stage though, this looks unlikely as

leading indicators such as the global purchasing

managers index of export orders points to a

further decline in coming months.

There are two immediate market concerns.The first is the extent to which higher tariffswill raise the costs in the US and crimpcompany investment.

The second is the impact of Chinese growthand any subsequent ramifications foremerging market assets.

Whilst most companies have only providedanecdotal evidence the JPM market analystteam have done some work that suggeststhat tariffs could hit 2019 earnings by $5-7 per share.

Looking ahead to 2018 earnings growth looks set to decelerate as profit margins come underpressure from rising rates and higher wages and potential for an escalation in trade tensions tofurther undermine profitability remains a risk.

Contact details

Churchill Investments plc

9 Woodborough Road

Winscombe

North Somerset BS25 1AB

To arrange an appointment, or for advice, please contact us on

01934 844444

or Email: info@churchillinvestments.co.uk

Source: Bloomberg, J.P. Morgan Asset Management. Expectations are calculated using OIS forwards.

Source: IPD Data as at June 2017. All properties standing investments equivalent yield relative to £45m to £50m lot size.

Smaller lot sizes can deliver significant yield advantage

Market expectations for policy rate

COMMERCIAL PROPERTY

FIXED INCOME

OUTLOOK World GDP forecast

Yield ad

vantag

e1.6%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%£50mto £45m

£45mto £40m

£40mto £35m

£35mto £30m

£30mto £25m

£25mto £20m

£20mto £15m

£15mto £10m

£10mto £5m

£5mto £0m

%

Contributions to World GDP growth (yoy), %

US

UK

Eurozone

Japan

Forecast

3.23.9

4.75.0

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

6

5

4

3

2

1

0

-1

-2

-3

Sep ‘18 Sep ‘19

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Sep ‘20 Sep ‘21 Sep ‘22

Source: Schroders Economics Group, 15 August 2017.

US Europe Japan Rest ofadvanced BRICS Rest of

Emerging WORLD

5.25.2

3.13.12.92.8

3.6

4.9

-0.8

2.4

3.3 3.32.6 3.0