Market Commentary – January 2020
By Neil Worsley, Investment Strategist
Political factors had a strong influence on the performance of financial markets in 2019 but as the year drew to a close, there was some lifting of the gloom which had been evident for much of the year.
In the UK, Brexit has dominated politics which, in turn, has had a strong bearing on the performance of domestic equities, bonds and in particular, sterling. With the recent general election giving an overwhelming victory to the Conservative Party there is now more certainty over the political landscape and, whether leaving the European Union is right or wrong, at least there is now more inevitability. With this development we have seen a recent surge in both the Pound and equities as companies once again are expected to begin a new process of investment which had been put on hold while the political backdrop remained so uncertain.
However, while there are certainly more Brexit developments to unfold over the next 12 months, there does now seem to be a better mood to fast-track some form of trade deal between the EU and UK and with Prime Minister Johnsons large parliamentary majority there should be few cliff edge votes which have been part and parcel of Brexit over the past 3 years. While equities and sterling received a lift in the aftermath of the election result, there is still further scope for UK equities to continue their rerating through 2020 as it is the cheapest of all the developed markets offering the lowest rating and highest yield, with the proviso of course that geopolitical events don’t once again intervene.
In Continental Europe, there was also a strong focus on politics with financial markets having concerns over the continued rise of populist parties and the significant changes at the heads of the European Central Bank (ECB) and the European Union. The sluggish EU economy and the lack of any significant growth continues to restrain equity investors but there is strong pressure on Germany, in particular, to use its economic power to kick start the turnaround. While investors aren’t holding their collective breath there is certainly scope for a continued move higher for equities here, especially if we do get signs of any economic improvement.
The US equity market continued to shine bright in 2019 fueled by interest rate cuts, decent economic growth and a huge spoonful of optimism. In sterling terms, the S&P rose close to 30% over the year, the market taking on a hefty rerating as it became a safe haven investment while other regions bore the brunt of uncertainty. However, equities here are now on all time valuation highs with only modest earnings growth forecast for 2020. While it may be premature to call the top of this market and some stocks certainly have great longer term potential, it is difficult to see the valuation disconnect with the rest of the world continuing over the medium term.
With the trade war between the US and China causing global growth uncertainty and the dollar continuing to strengthen throughout much of 2019, emerging markets proved to be a difficult area in which to make decent returns. However, with some resolution of the trade dispute seemingly in place and an ongoing, if difficult, dialogue taking place then we could see an improvement in returns here in 2020, especially as valuations are very supportive relative to developed markets.
Although most equity markets saw decent returns in 2019, there is still scope for pockets of these to perform in 2020 as, apart from the US, valuations are supportive of further advancement and many were held back by political uncertainty or trade disputes. While these issues will likely not disappear in 2020 they are at least being priced into valuations and with a US election looming in the autumn it is likely that a certain President will not want to rock the global boat too much.
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