Commentary on December 2019

Market Overview

December witnessed a euphoric close to the decade as markets reacted to a landslide election win in the UK and news that Phase 1 of the trade deal between the US and China had been agreed. Global markets rallied by 2-4% although, once again, the stronger pound reduced these gains when translated into sterling. The positive spin for UK equities saw domestically focussed companies gain 5-6%, compared to a more restrained 2-3% for those companies exposed to international trade.

Mixed economic data were over-looked in favour of the more optimistic political outlook, which it was hoped would reduce the uncertainty of business leaders and result in a rise in order books and investment intentions. Trade tariffs, due to take effect on December 15th, were averted as both sides worked towards a Phase 1 Trade Deal agreement. In the UK, Boris Johnson’s emphatic win boosted the currency and stock-markets, though his assertion that the UK would leave after the transition period, “Come what may,” in December 2020 reminded investors that some risks and uncertainty remained.

With the main central banks leaving interest rates unchanged, as expected, the focus fell on key personnel changes and policy intentions moving forward. The Bank of England announced Andrew Bailey as Governor Mark Carney’s successor as from February. The US Federal Reserve indicated that it had no plans to change rates in 2020 adding that, “The risks of using accommodative monetary policy are no longer great at a time when unemployment is low.”

In Europe, former Managing Director of the IMF, Christine Lagarde, addressed her first meeting as President of the European Central Bank. Her remarks were cautious with perhaps a touch of optimism, but the most striking comment was that, in view of the weakened economic outlook, the Council would welcome other (fiscal) policies to join monetary policy.

Our Views

For most of the year we’ve been saying that resolution of the US-China trade talks and Brexit negotiations would lead to a more optimistic outlook, and this might well be the case, hence the initial market reaction. However, whilst two areas of uncertainty have been removed, they’ve been replaced by Phase 2 of the trade deal (assuming a satisfactory sign-off of Phase 1 in January), and 11 months of Brexit transition negotiations with the inevitable repeat of a ‘no-deal’ exit threat.

That’s not to dampen what might well be a rosier outlook. Interest rates look certain to remain low and will be accompanied by fiscal spending in some quarters-Japan and the UK have already declared their hands, and the European Central Bank has put in a polite request. There are glimmers of a recovery, but the key is whether business confidence will pick-up sufficiently to re-ignite investment plans and replace consumers as the driver of economic activity.

Unfortunately, there’s no escaping the fact that next year will be a year of political, if not geo-political, risk ahead of the November US Presidential election. US President Trump has two areas of policy in which he can exert his own powers– trade and military policy; as he looks to make a vote-winning impression these are likely to remain well-used and may continue to damage global confidence.

So, the optimistic outlook is for a re-ignition of the economic cycle, supported by some combination of record low interest rates, quantitative easing and fiscal spending. The US-China trade talks and Brexit transition negotiations will continue throughout next year. We expect these to hinder a sustained economic recovery and add to stock-market volatility.

How are we currently positioned?

The Santa Claus rally left markets looking over-bought; if this move continues we will look to reduce risk. This will be achieved to an extent by the partial return of proceeds from the Woodford Equity Income fund towards the end of January, but we will also look at reducing exposure to global equities.

Our increased position in funds focussing on domestic UK companies fared well in December, as did our gold and silver fund which gained 14% over the month.

We remain underweight fixed interest and continue to prefer the relative value offered by UK equities.