Despite this, investors may be surprised to learn that 2019 was in fact the third best year of the last decade with the FTSE-100 registering a gain of 17.3% and the MSCI World (which has over 50% exposed to the US) registering a gain of 22.7% (Source: FE Analytics in £). This surprised us and other asset managers with many predicting a difficult, if not negative outcome at the start of 2019 following the sharp falls before Christmas as President Trump appeared to be trying to influence the Fed, accusing the organisation of causing an economic slowdown by not cutting interest rates in the face of increasing trade tariffs. Much to the surprise of many, the US economy has held up well despite the tariffs and confounded many of the doomsters.
Unfortunately, today’s instant news environment means that as soon as one negative diminishes, the media hunts around for a new negative to fill the void. We saw a year-end rally in Q4 where the FTSE-100 rose by 2.7% and the MSCI World rose by 7.5%. This was largely driven by the definitive UK election result and the anticipated resolution to the Brexit Withdrawal Bill impasse, but also by news of a phase one deal with China on tariffs with the US. In addition, the realisation that a hard left Corbyn government would not transpire was a relief to many investors with a comprehensive rejection of this approach by historically loyal Labour heartlands. This has driven the FTSE-250 mid-cap index and particularly sensitive sectors such as housebuilders, commercial property and some retailers.
We see the new negatives for 2020 being a reworked version of the same but in an evolved state and with the addition of some middle-eastern military tension. This last influence would appear to have run its course for the time being as far as market sensitivity goes with the oil price now below where it was just before hostilities erupted. In addition, the VIX Index, which measures the volatility of the S&P 500 and is a widely accepted measure of risk, has fallen back to where it was just before Christmas. The political rhetoric will rumble on but clearly there would appear to be little appetite for conflict from either side and the whole affair has now become a propaganda war, which is a return to the status-quo for the region. That said, defence stocks such as BAE Systems have been rallying in light of a clear western political focus on the security of the region. UK naval vessels are now escorting UK registered oil tankers along the Straits of Hormuz and will probably continue to do so for the foreseeable future, being a clear vulnerability for the west, having been targeted previously.
With regard to the phase one deal with China, this has been prefaced by the White House to such a degree that market expectations are possibly more than priced in, with commentators now looking forward to phase two. Indeed, the view from Wall Street is somewhat cynical with a lack of belief that the deal will achieve anything substantial. That said, the US market has been hitting new highs, more so on the fact that they are still talking and agreeing the terms of deal phases, which is a significant improvement on where it was previously with short-term threats applying new tariffs over Twitter. Of course, that could reappear at any moment and so nobody will really believe this phase one deal until the media showcase occurs. The Chinese stock market has also been strong as has Hong Kong in expectation, with the Q4 performance of the MSCI Emerging Markets Index up by 9.5% and the Hang Seng increasing by 8.4% in local currency. There is a well-used stock market saying that ‘it is better to travel than arrive’ which means much of the good news is priced in as the announcement approaches such that a short-term trader might wish to take profits before the announcement arrives. Clearly, that is not our approach and it would be unwise to try to pre-empt what President Trump may say about phase two. With President Trump’s election machine starting to fire up, it is unlikely to be undersold or negative in any way.
The other main brick in the wall of worry, as they say, is Brexit and the EU trade negotiations. Initial meetings have been held with the new EU Commission President, Ursula von der Leyen, who replaced Jean Claude Juncker, setting out the lie of the land and indicating that a comprehensive deal will be difficult to achieve in the timeframe. There is no shortage of sensationalist headlines predicting that the UK may still crash out without a deal. However, the market appears not to believe this, which is rational on two counts. Firstly, we have a precedent where the EU originally said there was no prospect of the backstop being renegotiated - which then was renegotiated in a very short time period before the General Election. Secondly, Liam Fox, Former International Trade Secretary, laid out a framework plan before Elizabeth Truss succeeded him in the Cabinet. This stated that a framework deal is quite possible which covers the less contentious issues regarding social policy, education and employment; defence, security and immigration; crime, justice and the law; parliament and legislation but leaves the thorny issues of farming, fishing and animal welfare; science, environment and transport; business, economy and finance and the big one, trade, for another day and a future timetable for their negotiation is loosely agreed. Alternatively, they may decide to prioritise trade and leave much of the less contentious issues for a later schedule.
The markets are telling us that a no-deal crash out is a very low probability, but this will increase as the year ticks by. This could put pressure on Sterling and the very same Brexit sensitive sectors that have rallied so strongly since the General Election. So, whilst the new negatives for 2020 are a sequel to 2019, they are different and less worrisome due to the large majority now held within parliament. From this perspective at least, we are feeling more comfortable with the outlook than we were before the General Election because the UK government only has to negotiate on one front, Brussels, rather than on two, which may have been impossible.
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Source: FE Analytics (information is correct as at 18th November 2019)
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