MARKET COMMENTARY – JANUARY 2020

With global stock markets closing at or near all-time highs, 2019 turned out to be an excellent year for equity investors.  Geo-political risks faded towards the end of the year and optimism increased that the US and China would agree a ‘phase one’ trade deal.  In the UK, the resounding victory of the Conservative party in the general election of 13 December provided greater certainty for investors and an end to the impasse over Brexit, leading to a rally for UK equities and sterling.

Developed market equities in particular had a strong 2019 with the US (S&P 500) leading the way returning +25.65% over the year, led by the information technology sector.  In the emerging markets space, in spite of the difficulties faced due to slower growth Chinese equity markets made strong progress, the SSE (Shanghai Stock Exchange Composite) having returned +15.42% for the year.  Eurozone shares also advanced supported by signs of better economic data from Germany.  Japanese equities ended the year higher with the services sector stronger and emerging market equities generally saw strong gains, Russia being the best performing global market supported by a pick up in crude oil prices.  Bonds enjoyed a positive year benefitting from the adoption of looser monetary policy by central banks earlier in the year.

Although the start of 2020 has been dominated by a new source of geopolitical tension in the Middle East as the threat of conflict between the US and Iran increased dramatically, the economic backdrop suggests that further gains are possible albeit restrained in comparison to 2019.

Valuations are looking less supportive than they were at the beginning of 2019, but not overstretched and expectations are that corporate earnings will remain steady.  Globally, labour markets are pushing up costs for companies as wage growth continues, consequently putting pressure on margins.  Any re-escalation of trade tensions may increase margin pressure leading firms to cut jobs and whilst higher wages have been a headwind for company profitability so far, there is also the potential that this may lead to higher sales and productivity.  Similarly, any further reductions in interest rates could lead to a similar effect.

There is uncertainty surrounding the current stage of the global economic cycle, particularly in the US.  Typically in the early stages valuations and interest rates are low and the economy has reasonable space in which to grow.  In the later stage, low unemployment and subdued business and consumer confidence feature.  Whilst labour markets are tight and unemployment is low by historical standards, consumer and business spending remain relatively robust and the consumer is proving resilient.  The absence of any significant increase in inflation would also suggest that the global economy has ample room to grow.  It is therefore proving difficult by these conventional measures to identify at which stage the global economy is positioned, the impact of unconventional central bank policies being a factor.

Central banks are expected to remain supportive in 2020, this is provided there is no notable increase in inflation or economic growth rates.  The consensus is that zero or even negative interest rates, quantitative easing and further asset purchases are leaving central banks with limited room for action, and the focus is therefore expected to partly shift to what governments can do fiscally in order to support ongoing expansion.

Predicting short-term movements in markets is rarely accurate and after a period of strong expansion, indeed the longest in recent history, a period of more subdued growth for equity markets would be a natural consequence of the economic cycle.  Specific risks are difficult to quantify, including Brexit, the US China trade negotiations and of course the US election in November 2020.  However with monetary policy remaining supportive and economic data relatively robust, in spite of weakness in certain areas such as manufacturing, there is no reason to doubt that the long term benefits of equity investment remain attractive.  Active management and a well-diversified approach to portfolio construction will aid in mitigating risk.

Performance 31 December 2018 to 31 December 2019

*December 2019