MARKET COMMENTARY – DECEMBER 2019

In spite of the geopolitical risks facing investors, equity markets continued to rally in November. There has not been a firm conclusion to the US/China trade negotiations, although there has not been any further escalations in tariffs. Whilst tariffs are scheduled to increase on 15 December in the absence of a deal, expectations that there will be some progress has helped boost investor sentiment. In the UK, the attention is firmly on the general election on 13 December.

With accommodative monetary policy continuing to provide support, developed market equities have outperformed their emerging market counterparts, with the US (S&P 500) continuing to lead the way as the top performing major equity index.  Government bond yields increased as demand for safe haven assets reduced.

Following concerns over the pace of economic growth in the US, there have been signs of an improvement in investor sentiment and business confidence.  This coupled with optimism surrounding easing geopolitical and trade tensions helped bolster equity market returns.  The corporate earnings season ended reasonably positively with the majority of companies beating expectations for the year, albeit expectations were modest against a challenging backdrop.  The estimate for third quarter US GDP rose, against previous expectations of a continued slowdown.  The market now expects only one more interest rate cut from the Federal Reserve in 2020.

Economic data generally improved in the eurozone and the perceived easing in trade tensions supported equity markets.  Concerns about the health of German manufacturing continue although improvement in November’s data from a low level and a third quarter GDP figure confirming the country narrowly avoided a technical recession was more positive.  Overall, business sentiment in the eurozone remains mixed with the service sector slowing and the European Central Bank (ECB) continuing to provide support in the form of quantitative easing and reducing interest rates further.  Fiscal stimulus particularly from countries with large surpluses such as Germany and Netherlands may move onto the agenda for 2020.

In the UK, the general election and the subsequent impact on Brexit has dominated.  The Bank of England opted to leave rates unchanged in their meeting of 7 November in the context of moderately weaker economic data, with wage growth and GDP falling below expectations. Added uncertainty surrounding Brexit is also a factor although the election may help to provide clarity. Sterling acts as a useful indicator for the state of negotiations and rose by 1% against the euro during November and stayed broadly flat against the dollar, although since August sterling has advanced significantly on optimism of an orderly exit from the EU being achieved.

In China, the authorities may have some concerns over recent weak manufacturing and consumer data which disappointed relative to expectations, the ongoing protests in Hong Kong continue to hinder the region’s economy along with ongoing trade uncertainty. The situation in Hong Kong does have some potential to disrupt US/China trade negotiations which would be a concern for global growth, impacting on the wider region and exporters.

Both equity and bond markets continue to be buoyed by supportive monetary policy, central banks have however largely taken a backseat in November with no further changes to current policy. Valuations seem to reflect investors’ optimism that there will be a pickup in economic growth and the possibility of a US/China trade deal being reached would support such optimism. There is the possibility of a phase one trade deal but also the risk that negotiations will fail, a balanced approach to portfolio construction is therefore sensible.  A focus on high quality equities and the inclusion of lower risk assets such as government bonds should help to provide support should growth fail to accelerate or trade tension escalates.  Alternative investments such as infrastructure can offer a relatively defensive income with low correlation to equities.

Performance to 3 December 2019

*November 2019