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Monthly Market Commentary - December 2019

Whilst markets ended the year on a strong note, the global economy remained weak.

Jon Cunliffe

in Fiduciary news


US equities closed 2019 at record highs. In US dollar terms, the S&P 500 returned 31.5% and in sterling terms 26.3% (the pound ended the year stronger versus the dollar). Investor sentiment was buoyed by the announcement of a “phase-one” trade deal between the US and China, involving the rollback of some existing tariffs on Chinese imports to the US in return for the purchase of a significant amount of US agricultural goods.

Despite this positive mood, not all is harmonious. The fundamental differences on intellectual property rights and technology transfer are unlikely to be addressed in the foreseeable future. In addition, Donald Trump signed an act which will ensure a formal review of human rights and democracy in Hong Kong, using the withdrawal of the principality’s special trading status as a stick to punish perceived violations.

Against this background, there is ample scope for negative developments in US-China relations but, given the 2020 US presidential election and domestic pressure on President Xi Jinping to deliver reasonable growth this year, it is in both sides’ interest to cool things down for the time being. Turning to the UK, whilst Brexit uncertainty is still likely to linger throughout 2020, the strength of the mandate won by the Conservative Party has reduced much of the domestic political risk premium, again boosting sentiment. Reflecting much-improved sentiment to UK assets, the mid cap FTSE 250 index returned 28.9% for the year, far outpacing the more international, large cap FTSE 100 index.

Whilst the markets ended the year on a strong note, the global economy remained weak. Growth is probably at its softest level since 2011 and corporate earnings growth is flirting with recession. The markets are looking through this unfavourable backdrop and anticipate a significant pickup in growth and corporate earnings delivery as we head through 2020, led by the manufacturing sector. Much of this expectation is in response to the lagged effects of broad-based monetary policy easing seen within both the developed (led by the US Federal Reserve) and emerging worlds during 2019, with expectations of some fiscal easing during 2020 and the near-term reduction in adverse political tail risks we have mentioned.

Whilst we expect a modest pickup in activity this year, starting valuations across most asset classes are considerably higher than this time last year, so there is much less scope for markets to shrug off disappointing growth and earnings data. As a result, our expectations this year are for much more modest asset price performance, with a typical balanced portfolio returning 4-6%, rather than last year’s 15-20% range.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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