The return on LD Discretionary, which is the largest investment fund at The Cost-of-Living Allowance Fund, stood at 8.5 per cent for 2019 and at 13.2 per cent over the last 36 months. The assets in LD Discretionary are allocated with an overweight in bonds, including secure, high-rated bonds, and a quarter in listed shares. The low interest rate environment is yielding modest returns, particularly on gold-backed bonds; therefore, given the asset allocation and risk level of LD Discretionary, the strong return for 2019 is satisfactory.
2019 ended on a high note
In December, there was a series of positive news stories which led to further rises in share prices, with several share indices reaching record highs, including the global MSCI World Index and the leading Danish OMXC25 index.
Prime Minister Boris Johnson’s party, the Conservatives, had a successful general election in the UK, winning 66 new seats. This gives the Conservatives a majority in Parliament, with 368 seats out of a total of 650. The Prime Minister’s strengthened position gives him a strong mandate to negotiate a Brexit deal.
A partial agreement in the trade war between China and the US was also in the spotlight. The parties agreed on a ‘Phase 1’ deal, under which some of the tariffs introduced on 1 September were halved, whilst the tariffs scheduled for 15 December were rolled back. The agreement is expected to be signed by both parties on 15 January 2020 in Washington. Exactly what they will agree on remains uncertain, but the stock markets are reacting positively to any sign of progress.
A majority of the board of the US Federal Reserve, which sets monetary policy in the US, announced that they saw no reason to change the current interest rate level. The stock markets reacted positively to the announcement, as it signals that the key interest rate will remain low and that liquidity in the market will therefore remain strong.
An uncertain start to 2020
The new year has begun on a more uncertain note than the old one ended. The US attacked an Iranian military general on 3 January, and Iran retaliated by attacking a military base in Iraq and mistakenly shooting down a passenger aircraft. Since then, there have been counter-demonstrations in Iran. The conflict between the US and Iran has caused turmoil on the stock markets, with share prices falling whilst the prices of gold and oil have risen. Any escalation of the unrest is likely to result in a far more volatile stock market.
The first interesting key economic indicator published in 2020 was the US ‘ISM Manufacturing’ index, which is a leading indicator of activity in the manufacturing sector. The figure has fallen to its lowest level since the financial crisis. The labour market and the services sector, on the other hand, remain strong, with historically low unemployment and high private consumption.
In the eurozone, it is the services sector in particular that is driving economic growth. Retail trade and private consumption helped to ensure growth towards the end of 2019. Ten-year European government bond yields have therefore also risen significantly since August, when German yields hit a low of -0.71 per cent.
The figures are broadly in line with general expectations for 2020. In the US, growth is expected to be weaker than that experienced by the US economy over the past few years. This is certainly not unusual for a country that has enjoyed a long period of economic boom. Given a continued low-interest-rate environment and a de-escalation of the trade conflict, marginally stronger growth is expected in both Europe and China. Globally, the outlook for the first half of 2020 therefore remains one of growth, driven primarily by markets outside the US.
