January was an eventful month as concerns over the coronavirus outbreak scaled back investor optimism following the signing of a ‘phase one’ trade deal between the US and China. Geo-political tensions escalated between the US and Iran following the assassination of a top Iranian general, although the possibility of further divisive action from either side receded quickly and markets were not greatly unsettled by the news. Broadly, economic data across many regions continues to show signs of improvement and against a backdrop of supportive monetary policy fears of a sharp slowdown in global growth have subsided. Closer to home, the UK officially left the EU on 31 January and the process has begun to agree a new trade agreement before the end of the year.
While easing tensions between the US and China were well received by investors, significant tariffs remain in place. The signing of the ‘phase one’ trade deal will see the US suspend its next planned round of tariffs and reduce existing tariffs on c. 110 billion USD of Chinese imports by 50%. In return, China has committed to increasing planned imports from the US by c. 200 billion USD, improve access to its markets for financial services companies, allow greater transparency in their currency management practices and enforce intellectual property protections.
Investors are now likely to focus on upcoming economic data releases, which will impact business confidence as global companies decide whether to further or restore expansion plans as uncertainty led to a number being postponed in 2019. With the US presidential election in November, businesses are however likely to remain relatively risk averse. The US election is the main political event of the year and history strongly favours the incumbent. Nearly three quarters of sitting presidents have been re-elected and since 1932 an incumbent president has never failed to win an election, unless a recession has occurred during their time in office. This may go some way to explaining the President’s more conservative tone on trade.
Overall, the US economy remains relatively well supported, although manufacturing has been weak as the sector continues to contract. On the services side, the outlook remains steady and the consumer, the foundation of the US economy is resilient. The data seems to be in line with the Federal Reserve’s outlook of moderate growth and a tight labour market, therefore the decision to keep interest rates unchanged at the FOMC (Federal Open Market Committee) meeting in January was in line with market expectations. Meanwhile, the US fourth quarter earnings season is in progress, with a number of companies exceeding expectations so far.
In Europe, growth remains positive albeit at subdued levels. Economic data has shown some improvement as the consumer continues to be supported by a strong labour market and manufacturing saw a notable rebound, largely attributable to the establishment of the ‘phase one’ trade deal. The European Central Bank (ECB) meeting saw rates unchanged, with the main point being the announcement of a full review of monetary policy strategy, including the successes and drawbacks, how the ECB is to meet its objective of Eurozone price stability, and environmental sustainability. Lastly, current ECB president, Christine Lagarde, once again highlighted the need for more fiscal stimuli, taking the view that fiscal support would increase the effectiveness of current monetary policy.
The UK saw improving economic data following a deterioration in the run up to the general election, although there has since been some rebound with unemployment falling and confidence being partially restored within the manufacturing and service sectors. In this context, the Bank of England opted to keep interest rates on hold at 0.75%. The UK market arguably offers areas of attractive value as greater political stability has boosted confidence. Merger and acquisition activity also speaks for the value available in UK listed companies, particularly as businesses can be acquired at depressed valuations and debt markets accessed at attractive yields.
Emerging market equities have largely been impacted by fears concerning the coronavirus, particularly in China and the neighbouring economies as near-term business activity and consumption would be expected to slow as preventative measures impact economic activity. This is addition to the associated weaker demand for oil, impacting net exporters such as Saudi Arabia and Russia as a result of a near-term slowdown. Elsewhere, a movement into perceived safe haven assets such as the US dollar was a headwind for those emerging economies with significant amounts of dollar denominated debt, as the currency rose against many emerging market currencies over the month.
Political events in January and the coronavirus outbreak serve to remind investors that in addition to managing portfolios against forthcoming known economic risks, portfolios should be positioned to cope with unexpected changes. A well-diversified approach to portfolio construction across both asset class and geography remains prudent.
|2020 Year to Date Total Returns|
|FTSE World ex-UK||+4.03%|
|FTSE Actuaries UK Conventional Gilt All Stocks||+2.53%|
|FTSE Actuaries UK Index-Linked All Stocks||+3.77%|
Performance to 31 January 2020
|Bank of England Base Rate||0.75%|
|Inflation (Retail Prices Index)*||2.20%|