Market overview: Alan McIntosh, Chief Investment Strategist

Global stock markets closed at or near all-time highs at the end of December (in marked contrast to this time last year), rounding off one of the best twelve month periods for investment returns in several decades.

Three quarter-point interest rate cuts by the US central bank, the Federal Reserve, kept the US economy from slowing down too rapidly in 2019. Meanwhile solid job growth accompanied by a modest increase in wages kept consumer confidence high, despite the impact of trade frictions between the US and China. This latter situation took a more positive turn at year-end as President Trump announced that a “Phase 1” trade deal with China would be signed in the middle of January. In the UK, the Brexit saga closed its latest chapter with Boris Johnson securing a Withdrawal Agreement from the EU and a commanding majority at the general election.

2020 starts with a new source of geopolitical tension, namely the assassination of a senior Iranian military commander by the US. It is too early to speculate where this may lead, but undoubtedly the risks of retaliatory action have increased.

Later this year, key events will include the US presidential election. Assuming Donald Trump survives the current impeachment process, he faces a strong potential Democratic challenge. This will at least give him an incentive not to do anything to damage the economy ahead of November, which might suggest further trade accommodation with China. Closer to home, the challenge for the UK will be to draft a Future Trading Arrangement with the EU by year-end to avoid leaving without a deal. While this sounds unlikely given the time available, it is not impossible. Few would have believed that Boris Johnson would have secured an acceptable Withdrawal Agreement in short order after Theresa May failed three times.

Given the outsize investment returns achieved last year, it is unrealistic to expect the same again in 2020. Nevertheless, low interest rates and low inflation accompanied by positive economic growth suggest that modest positive returns should still be possible, particularly when you take into account the above-inflation dividend yields available in most major equity markets. Happy investing!

Economic overview: Richard Carter, Head of Fixed Interest Research

As the year began, the macro news was looking pretty good after Donald Trump announced he would sign a US-China Phase One trade agreement on 15 January. However, this was rapidly overtaken by the assassination of Iranian General Qasem Soleimani and we are now left worrying about a possible new conflict in the Middle East. Bond yields had been rising and yield curves had been steepening in recent weeks but this has now gone into reverse while we await events.

On the economic front, the first major data point of the year was a big let-down. The US ISM manufacturing index fell to the lowest level since June 2009 as the sector continues to struggle –   despite better news on the trade front. PMIs released in Europe and the UK did improve a bit but overall remain weak and most major economies are still very reliant on the consumer to drive growth. Non-farm payrolls are released on the US on Friday but we would expect the Federal Reserve to keep interest rates on hold for the foreseeable future after three cuts in 2019.

Elsewhere this week, the new European Commission President Ursula von der Leyen will be visiting Boris Johnson to discuss trade talks and other matters. As things stand, the UK is on course to leave the EU at the end of January and move into the transition phase where the details of the future relationship will hopefully be agreed. It is likely that the UK economy will be hampered by uncertainty for some time although the large Conservative majority should lead to better news and more decisive action on the political front.

Written by

Alan McIntosh
Chief Investment Strategist
Richard Carter
Head of Fixed Interest Research

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