The Multi-Asset Process

December 2019 Market Review

Any comparisons between Boris Johnson and Santa Claus can be left to readers’ own discretion but the traditional December rally in markets had a much more Johnsonian than Kringalian favour this year. This gave a final gloss to the strongest 12 months for global stock markets since 2009, with the MSCI World Index up 24%, the S&P 500 25% and the FTSE 100 12%.

In the UK’s first Christmas General Election since 1923, Johnson’s Conservative party won a comprehensive victory, putting concerns of a hung parliament to the sword with the largest Tory majority in 25 years. Such a result showed an electorate firmly deciding that getting Brexit done was the priority for the next government and, given this mandate, the Prime Minister acted swiftly to get the EU Withdrawal Bill through Parliament.

Of course, the full ramifications will become clear in the coming months but this result does remove near-term uncertainty and should give a much-needed boost to both corporate and consumer confidence – as we quickly saw with a surging pound and equity markets. There is also the post-election pledge to spend on health and safety, which will further support a pick-up in UK economic activity.

Looking further out, any relief rally may be short lived as the PM and his cabinet move into the second phase of negotiations, which will include striking a new trade agreement with the EU and agreeing transition plans, preferably before the end of 2020.

A hard Brexit remains very much among the possibilities and 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. Given the further gains by the SNP in Scotland, we would also expect to see renewed pressure for a second independence referendum and the situation with Northern Ireland is far from straightforward.

As we always stress when it comes to politics, we remain long-term patient investors and history clearly shows that attempting to time moves in and out of markets, either to capture opportunity or avoid risk, is rarely a positive strategy. It is also worth reiterating we are very much global investors: whatever happens under the Johnson government over the coming years, the UK only comprises 6.6% of the global stock market and 3.4% of the global economy so there are far larger forces at play when it comes to our portfolios.

We did review our UK equity exposure in light of the election, predicting a Tory majority in the region of 30. We felt this would see sterling strengthen and domestic-focused businesses rally, and both came to pass in the immediate aftermath. Ultimately, we felt the portfolios have enough small and mid-cap exposure and conditions do not warrant adding more risk at this point.

Meanwhile, in another festive bonus for markets, December also saw 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 there are details 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 that were 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 the campaign, particularly with the impeachment inquiry finally confirmed in December. It is difficult not to see a Christmas giveaway pre-election as the major factor behind the deal, with the decorations, game consoles and iPhones due to be hit with a 15% tariff off the hook. The share of these goods coming from China is around 85%, according to Bloomberg analysis.

Elsewhere, December marked a quiet end to the year on the policy front, with the Federal Reserve holding rates steady in the shadow of tariff hikes that were eventually rescinded. More cuts are expected in 2020 but it is hard to predict what will happen in what will undoubtedly be a turbulent election year, particularly given how Trump has treated the Fed in recent months.

 

We have seen commentators reintroduce the goldilocks analogy for the Fed’s situation, with growth, inflation and monetary conditions neither too hot nor too cold for further hikes – and it will be interesting to watch how the central bank behaves as the year progresses.

 

Meanwhile, Christine Lagarde chaired her first monetary policy meeting of the European Central Bank, at which she promised to be a wise owl rather than a hawk or dove.

 

We have written a separate, more comprehensive, 2020 outlook but to summarise: we see a fairly clear asset allocation call for the year of maintaining an underweight position to US equities and buying pretty much any other equity markets, primarily on valuation grounds. Despite the positive noises at the end 2019, trade still looks set to remain the key driver of sentiment but, as ever, we will endeavour to ignore the short-term noise as far as we are able.

For a comprehensive list of common financial words and terms, see our glossary here.

 

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Tuesday, January 14, 2020, 9:22 AM