Capital Markets Update
- In a nutshell
- Trade deal agreed
- Tories win big majority
- Economic data largely positive
In a nutshell
December saw another positive month for risk assets. Equity markets continued to rally, driven by a ‘phase one’ trade deal agreed and solid global economic data. Bonds continued to sell off and yields rose as investors became more sanguine about prospects for the global economy.
Trade deal agreed
A ‘phase one’ trade deal between the US and China was agreed upon in December and is set to be signed on 15 January. This meant that tariffs on consumer goods scheduled for mid-December were withdrawn, and many existing tariffs were either reduced or cancelled. In addition, Trump said negotiations on a ‘phase two’ deal would begin “immediately, rather than waiting until after the 2020 election”, which gave investors additional cause to cheer.
Whilst we are encouraged by recent developments, we continue to believe that the popularity of China bashing from both sides of Congress and the complex problem of intellectual property rights continues to put a ceiling on how much things can improve. We therefore believe an element of caution is still warranted on this issue.
Tories win big majority
On the 12 December, the Conservative party surprised pollsters by winning a thumping Parliamentary majority. This result was warmly received by investors, who were worried about the prospect of a business unfriendly Labour government. In addition, there is potential that the size of the majority achieved will make the government less reliant on the Eurosceptic ERG wing of the party, thus providing more room to pivot towards a more market-friendly Brexit with regards to trade. UK small and mid-caps, along with more domestically focused businesses, continued to enjoy a rally in share prices.
For investors it is encouraging to see the more traditionally business friendly Conservative party win a resounding victory, there remains great uncertainty about the course of future Brexit negotiations. The shape of the trade deal has yet to be fleshed out, and Boris Johnson’s commitment to ruling out an extension to the transition period raises the possibility of a ‘no deal’ crash-out on trade. So, like the US-Sino trade dispute, we believe that an element of caution is still warranted on this issue.
Economic data largely positive
December saw a slew of positive global data points released. In the US, retail sales were strong, with another record Cyber Monday posted, indicating that the US consumer remains in rude health. In addition, the housing market showed further signs of recovery and unemployment continues to fall. In the Eurozone, the picture was more mixed as the services PMI surprised on the upside whilst the manufacturing equivalent showed further deterioration. In the UK, the picture was more grim as both the services and manufacturing PMI reading pointed to contraction, and retail sales disappointed. And finally, in China, data releases in December suggest stabilisation in the economy, with retail sales and producer price inflation coming in better than expected.
Multi manager team views
We continue to believe that we are going through a patch of slowing growth rather than a protracted slowdown, and recent positive data releases from the two biggest economic powers, the US and China, seem to support that. In addition, it looks like central banks globally are prepared to use their monetary firepower to keep the global economy afloat. Given that the backdrop has not changed materially, we remain conscious that there are key risks that could lead to the downside, including a reignition of the trade war, wage growth crimping US corporate margins and a failure of central banks to accommodate appropriately. In Europe we would also note that whilst ECB monetary stimulus is welcomed, to be more efficacious it should also be accompanied by fiscal stimulus also. We therefore believe that an element of caution is still warranted on equity markets at this juncture.
The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.