Just over a year ago, in the final quarter of 2018, we were witnessing a synchronised slowdown in global growth and a concurrent downturn in equity markets, which meant investors were entering 2019 in a downbeat mood.
Nevertheless, we still expected that equities would outperform cash and bonds over the year, due to attractive equity valuations and a US president determined to boost the US economy.
Happily, this was the case. It has been a bumpy ride in some markets but the UKs FTSE100 ended the year up by 12%, while the FTSE250 had a particularly good year, up by 25%. The US market continued to hit record highs its S&P500 index rose by 29% while Chinas Shanghai Composite Index rose by 22%, even as its economy slowed and the trade war hit its exports.
Despite strong returns from equity markets, 2019 was a mixed bag in terms of economic growth with a manufacturing slowdown weighing on growth in the US and more severely in Germany and China. The year ended, however, with signs of life returning to that part of the market which we expect to gather pace as 2020 progresses.
Perhaps the most important factor for the year ahead is the possible resolution of the trade dispute between the US and China. Markets reacted enthusiastically to news in December that a partial trade deal had been struck, although it has yet to be signed. If completed, it will be good news for the global economy as it reduces uncertainty and should boost investment and hiring. America says negotiations will begin immediately, but China may want to wait until after the US elections in November, when there may be a more amenable incumbent in the White House.
Our base case view remains that the trade war between the US and China will not escalate to the extent that it results in a serious growth downturn, and President Trump will want the US economy to be in good shape to boost his chances of re-election in November. But just as it seemed that progress was being made on the trade war, President Trump has created another geo-political flashpoint by ordering the air strike that killed one of Iran’s most senior military leaders. The obvious concern is that it may escalate into a conflict that could drag in other countries and involve some of the worlds biggest oil producers. It is a situation that will need close monitoring as it develops during 2020.
Encouragingly, China has started the year in an assertive manner, with more measures to stimulate economic activity. It has cut the capital reserve requirement for its banks, which Chinese authorities said would have the effect of injecting 800bn yuan (£88bn) of liquidity into its financial system, freeing up cash to lend to businesses and consumers. It also changed a key benchmark interest rate to lower borrowing costs for businesses, which should boost investment and hiring.
In the UK, the end of the era of austerity, as promised in the Conservative manifesto, will provide some support to the economy, but there is still uncertainty around Brexit despite the threat of a second referendum being removed. Boris Johnsons refusal to allow an extension to the negotiating period increases the risk of a no-deal withdrawal before the transition period expires at the end of 2020.
This has already led to a sharp drop in the pound, although this in itself is a mixed blessing; with a large share of the revenues of UK companies coming from overseas, many stocks benefit when the pound falls, providing some offset to the rise in living costs that the weak pound causes. Crucially, however, the spectre of a disorderly Brexit may still deter investment in the UK, both by UK companies and by foreign investors.
Looking ahead, the outlook for the traditional elements of economic growth are mixed. The household sector is by far the biggest part of the UK economy and house prices have historically been an important driver of retail spending. National average house prices are still rising, but only just. If the past is a good guide, retail sales growth will fall. There are enough positives as we enter 2020 for equities to outperform bonds and cash once more. While some notable risks remain, we are alert to the opportunities and challenges that these present. That is why we manage diversified portfolios of asset classes and geographical regions which can capture the opportunities that are thrown up by any market corrections or price shifts in particular assets, creating selective buying opportunities for our clients. Following such a strong year in 2019 we have to be realistic about the prospects for 2020 but that doesnt mean being pessimistic.
As legendary investor Peter Lynch pointed out: Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.