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Capital Markets Update: January 2020

Octopus Multi-Manager team17 February 2020

Capital Markets Update

  • In a nutshell
  • Coronavirus concerns
  • Phase one trade deal signed
  • Economic data continues to improve

In a nutshell

January saw some of the buoyant investor sentiment roll over, as markets became rattled. First, by an increase in geopolitical tensions with the US killing of Iranian commander Soleimani, and then by an escalation of the coronavirus. On a regional basis, (in GBP terms), US equities delivered the only positive returns, driven by technology. All other regions lagged, particularly Asian equities, due to fears over the coronavirus. Yields fell and credit spreads widened amid the risk-off mood at the end of the month.

Coronavirus concerns

A new strain of a coronavirus broke out in China, originating in Wuhan, China. The number of those that have contracted the disease now exceeds that of SARS in 2003, however the number of fatalities remains less. The disease has now spread to 26 countries outside of China. It is difficult to estimate how the situation will develop from here, however what is more certain is that there will be a short-term impact on the economic growth of China and its neighbours. The Chinese authorities have already intervened with some stimulus measures to try to shore up confidence.

Whilst we cannot claim to have foresight on how the coronavirus will develop, we are encouraged that the Chinese government has shown a willingness to step in if matters deteriorate further. We recognise though that in the short term there could be further pressure on equities, and we will continue to monitor the situation closely.

Phase one trade deal signed

On the 15 January, the US and China signed a trade agreement as planned. The deal removes future planned tariffs by the US, as well as reducing existing tariff rates on roughly USD 110 billion of Chinese imports, from 15% to 7.5%. In return, China has pledged to import more from the US as well as allowing greater access to its markets for financial services, being more open its currency management and enforcing more stringent intellectual property protections.

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. In addition, we would note that whilst the US and China have reached a trade détente, the trade dispute between the US and Europe is only just beginning. We therefore believe an element of caution is still warranted on concerns around global trade.

Economic data continues to improve

January saw continued positive momentum of global economic data. In the US, although manufacturing remains weak, Q4 2019 growth was generally solid, driven by a strong consumer and a healthy services sector. The consumer, the engine of the economy, remains in rude health, with continuing falling unemployment and robust wage growth. Whilst the Eurozone isn’t growing at as an impressive rate as the US (just +0.1% in Q4 2019), the struggling manufacturing sector experienced a sharp rebound, and it is hoped that the phase one trade deal should provide a further boost. Even in the UK, which has been grappling with Brexit and election uncertainty, saw a strong rebound in manufacturing and services. And finally China posted strong Q4 2019 growth, and robust retail numbers, however we know that this is likely to be unsustainable, at least in the short term, owing to the impact of the coronavirus.

Multi manager team views

We are encouraged by the continued improving economic data, and this is starting to vindicate our view that 2018/2019 represented a patch of slowing growth rather than a protracted slowdown. 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, a failure of central banks to accommodate appropriately and now most recently the threat of a global pandemic.

Important information:

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.

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