2019 was a positive year for global equity markets. US indices reached record highs and UK shares rebounded after what has been described as a “market friendly” election result. We saw the US & China pontificate on whether they were going to agree a preliminary trade deal. Fortunately, common sense seemed to prevail and the dialogue between the world’s two largest economies is more cordial than 12 months ago. The Conservative majority will provide more investor confidence, but we are wary that the threat of a no deal Brexit is constant and will cause some currency fluctuations. As we say goodbye to the teenage decade, we welcome the twenties. The next ten years are certain to bring different types of market risk but we strive to manage this on your behalf.
The Conservative majority of 80 surprised political commentators and investors as many were expecting a smaller majority or even a hung parliament. The positive reaction of the UK stock market was immediately evident with the FTSE 250 (barometer of the health of UK domestically focused companies) increasing by 5%, recovering some of the losses caused by the Brexit uncertainty we have experienced over the past three years. We also saw large fluctuations in the pound versus other major currencies. Originally, there was a marked strengthening as investors believed that there could be some Brexit certainty with a stronger government allowing our parliament to have a united strategy to negotiate our exit terms and then the trade deal. However, whilst the Conservative government have agreed terms with the European Union regarding the UK’s exit, it is still uncertain whether a trade deal can be settled prior to the end of the transition period which ends in December 2020. Boris Johnson has stated that the UK will not extend the transition period and therefore fears of a no deal have already come back to haunt the strength of the pound. As a result, the Boris Johnson relief rally was short lived, and the pound has already fallen back to its original level prior to the election.
In terms of the trade deal, Brussels has stressed that the 11-month window to negotiate will force both sides to “prioritise” and potentially leave some issues unresolved until later. EU officials privately say that the quality of the talks will benefit from more time, something that could happen only if Mr Johnson reversed his opposition to extending Britain’s post-Brexit transition period beyond the end of 2020. Any extension would stoke the ire of many in Mr Johnson’s Conservative party, not least because it would require a further financial contribution to the EU. It will be an interesting twelve months with many twists and turns expected. We do not predict a no deal outcome as we believe the government realise that this will be economically damaging for the UK economy.
Much of global market sentiment in 2019 was whimsically determined by whether the US and China can find a mutual agreement in a trade war which began in March 2018. Many have argued that the trade war is a political game which will allow Donald Trump to eventually claim a “moral and economic” victory against China and therefore publicise this to the US electorate to bolster his support for the November 2020 election. The US president has now agreed a “phase one” trade deal with China. This agreement means that the US will not proceed with any escalation in existing tariffs and China has agreed to tighten intellectual property, purchase US agricultural goods and banned any forced transfer of technology from US companies. We are hopeful that this gained ground will lead to further harmonisation in 2020, as Trump will aim to be re-elected in November 2020, and the economy will be his main calling card.
The current impeachment proceedings against the US president are unlikely to be successful as the Republicans have a majority in the Senate. In fact, Donald Trump is attempting to use the impeachment as political ammunition to attempt to be re-elected in 2020. The US president has stated that the Democrats are simply bitter from 2016 election where Hillary Clinton was defeated. The Republicans will aim to spin the impeachment proceedings in their favour but time will tell whether this will have an impact on Trump’s election hopes.
The global trade slowdown has hit the European Union the hardest, latest figures have illustrated. Uncertainty over the UK’s exit from the trading bloc and Germany’s sluggish economy has deepened economic frailty caused by the US-China trade war. Exports and imports declined across all major EU countries, with falls of 3.6% and 1.7% respectively in France, and of 0.4% and 1.8% in Germany. In Italy, trade continued to fall for a sixth straight quarter. This will put immediate pressure on Christine Lagarde, who has now taken her role as head of the European Central Bank.
China’s slowest GDP growth in nearly three decades highlights how the trade war has dampened the economy. Weaker economic growth has prompted the Chinese government to initiate a series of stimulus measures, as well as discussions around potential tax cuts. We still believe that the most viable solution for growth in this area is for China to make an agreement with the US to remove the restrictive trade barriers and reopen opportunities. This is looking more likely but the conclusion remains ambiguous.
Macro events such as US-China trade negotiations, the UK trade deal negotiation with the European Union and the slowdown in the Eurozone are all influencing the direction of markets. The US-China talks continue to be protracted but we are hopeful that both world leaders will come to an amicable agreement to provide more certainty within the world economy. Despite the Federal Reserve dampening their outlook on domestic growth, the US is powering ahead when compared with other developed economies and we are seeing the economy continue to defy expectations. The UK market will remain uncertain until the Brexit ambiguity has been resolved. The outlook for Europe is negative at present with Brexit uncertainty and US-China trade tensions being clear factors affecting this, which we believe will continue in the short term. We continue to favour fund managers that have a flexible, active approach, with a global remit, so they can asset allocate across the entire investment world (as we believe diversification is key). However, most importantly we will endeavour, on your behalf, to identify fund managers that invest in underleveraged companies with strong balance sheets as we believe that highly indebted companies will be punished, if there are any unexpected events.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 2nd January 2020 and are subject to change. The update is for information purposes only. Source: Financial Times.