John Husselbee

Déjà vu all over again?

John Husselbee

Writing investment commentaries over the last couple of years has been a challenging task, at least for anyone craving variety, with trade and Brexit dominant throughout and rarely enjoying any sustained progress.

It is refreshing, therefore, to be starting a new year – and a new decade – with positive developments on both fronts, however people feel about the political agendas driving these. Many of our peers have badged their festive outlook pieces with some variation of ‘2020 vision’ as the title and while no one can claim a clear line of sight of the coming year, the economic path certainly looks clearer than for much of 2019 – or at least it did until President Trump started 2020 with Iran in his sights.

Before looking forward, it is worth pausing to consider the last decade, which has been marked by a stop-start recovery from the global financial crisis, low growth and low interest rates – and, mirroring the Brexit/trade quagmire of recent years, these conditions largely persist today. The missing ingredient of the last decade has been the reignition of inflation, which was expected to come out of low interest rates and widespread money printing via quantitative easing (QE) but seems to have been held in check by globalisation as well as technology in various disruptive forms.

More recently, there are signs the broad globalisation trend has gone in reverse, whether via protectionist policies or the rise in populism around the world, and it remains to be seen whether this is enough to unleash greater inflationary forces over the course of the 2020s. We would also cite the growing environmental, social and governance (ESG) drive as a potential pressure on inflation, with people’s desire to shrink their carbon footprint encouraging more local sourcing of goods.

Much of the rise in populism has been driven by growing inequality and this has been a key cause of Brexit and and the Donald Trump-led trade war.

Looking at Brexit first, we have just come out of Britain’s first Christmas General Election since 1923 and the largest Tory majority in 25 years showed a nation firmly deciding that getting Brexit done was the priority for the next government. While the full ramifications will become clear in the coming months, this result does remove near-term uncertainty and should give a much-needed boost to both corporate and consumer confidence.

With Labour in the doldrums and faced with another potentially divisive leadership battle, Boris Johnson looks to have a clear run as he moves into the second phase of negotiations, including striking a new trade agreement with the EU.

Johnson himself appeared surprised to have won so many apparently ‘safe Labour’ seats in the North and now faces the challenge of uniting the country and giving something back to people who supported him, however reluctantly – perhaps on both sides. We would hope to see that come through in the form of fiscal spending and given the dominant role of the NHS in UK political debate, it will be important this money is used in the ‘right’ places.

Looking through the immediate relief rally in markets, we should acknowledge a hard Brexit remains among the possibilities and some uncertainty will remain until deals are struck: if a trade deal is not agreed before the end 2020 deadline, the government has pledged not to extend the transition period any further so we could see volatility return in short order.

December finally gave us a significant move forward in the near two-year trade war between the US and China, with both sides agreeing to a phase one deal. While details are yet to be confirmed, this saw the US pledge to cut back some of the existing tariffs on Chinese goods and cancel a further round of charges due to be implemented on 15 December. In return, China has committed to buying more US agriculture products and strengthen laws protecting foreign companies operating there.

Trump said phase two discussions would begin immediately rather than waiting for the 2020 election and this gives him a significant positive to take into next year’s campaigning for the Presidential election, particularly with the impeachment inquiry finally confirmed in December.

Electioneering will begin in earnest in the coming weeks and politicians will be keen to get their vote-winning policies front and centre. Trump has handed large sums of money to the corporate sector during his tenure and this has been reflected in higher share prices – but his unpredictability should not be underestimated and we may well see another bout of attacks on America’s tech giants and possible pledges of anti-trust legislation.

It will also be fascinating to see how the Federal Reserve and other central banks conduct themselves against this backdrop: more Fed cuts are expected but how will it react to inevitable hectoring from the White House as election pressure ramps up?

Trump remains a hugely controversial figure and while we are among the many troubled by his tactics, his efforts have proved market-friendly overall. We are all used to a world of political niceties but in an era of all-encompassing social media, we will perhaps have to get used to this kind of Trumpean gunboat diplomacy – albeit of the keyboard warrior variety.

Just as a Labour victory in the UK would have seen large-scale unwinding of Tory policies, a Democrat victory in the US would bring wholesale change, not least a reattribution of money away from corporates and towards consumers.

Ultimately, we continue to favour equities and hold to our view that while recession fears are understandable, too many powerful people have too much to lose from economic downturn. As we have seen, the current inhabitant of 1600 Pennsylvania Avenue will stop at nothing to continue the market expansion for which he claims credit.

In terms of our portfolios, the asset allocation call is a clear one: maintain an underweight to US equities and buy pretty much any other equity markets, primarily on valuation grounds. We continue to favour Asia and emerging markets over the long term but it is fair to say that ongoing market noise has obscured the long-term fundamentals. These markets tend to perform best when the global economy is growing and the oil price and dollar are weak – and recent events in the Middle East will clearly have an impact on the former.

Bonds also maintain significant diversification benefits and with the US expected to keep cutting rates and QE policies returning to the fore, we see plenty of fuel left in this asset class.

We always stress that our crystal ball is no clearer than anyone else’s but it is hard to look beyond trade as the key for markets this year, with deals between the US and China and the UK and EU likely to dominate sentiment, possibly alongside ongoing fallout from the Iran situation. So perhaps a case of déjà vu all over again, after all.  

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Tuesday, January 14, 2020, 9:29 AM