The return for LD Discretionary, which is the largest investment fund for the Cost-of-Living Allowance Fund, stood at 1.6% on 20 February 2020. The return over the last 36 months stands at 13.2%. The year got off to a positive start. The risk appetite seen in December carried over into January, with share prices rising on the stock markets during the first three weeks, after which the market became more cautious due to the coronavirus outbreak in China.
Trade disputes and central banks’ monetary policy
A Phase 1 agreement on tariffs on goods and services between China and the US was signed on 15 January, reducing uncertainty over a trade war. The key economic indicators published in January have otherwise been mixed. It is encouraging that the services sector – particularly in the US – continues to perform strongly. Leading indicators for the industrial and manufacturing sectors rose again in January, after falling to their lowest level since 2009 the previous month. Unemployment in both Europe and the US remains low, whilst the number of new jobs in the US has fallen. The service and retail sectors continue to perform well – albeit at a slower pace than six months ago – which is crucial, as the service sector accounts for the majority of the US economy.
Earnings growth for listed companies has been on a downward trend for some time, but financial results for the most recent quarter show that earnings are actually better than market expectations, a fact to which the stock market is also responding positively.
Interest rates remain low and monetary policy is accommodative. Stock markets are reacting positively to announcements and signals regarding continued low policy rates and high liquidity, which is driving share prices higher. The monetary policy of the major central banks will therefore also be one of the key themes for 2020. The US Federal Reserve is expected to keep interest rates at their current low level throughout the year. However, there is an increased likelihood that the central bank’s bond purchases will be significantly reduced in the second quarter of 2020.
The coronavirus and high politics
A new flu-like coronavirus, COVID-19, has broken out in China and has, in a short space of time, spread rapidly, particularly to Asia, but also to the US and Europe. The mortality rate is significantly lower than that of previous viruses, such as SARS, but the number of people infected is higher. Fears are contributing to the downturn in the Chinese economy, where travel restrictions and trade bans are leading to lower growth. Chinese shares also fell in late January and early February, but have since risen again. The extent to which global growth and the economy are affected will depend on how the virus spreads in the coming period.
The US presidential election will also be a defining feature of 2020. The US remains the most important market. Over the coming months, the Democrats will hold primaries to select their candidate for the presidential election against the Republican president, Donald Trump. It looks set to be an exciting election with many unknown factors, in which the leading Democratic socialist, Bernie Sanders, in particular, could create uncertainty for certain industries in the US, including the pharmaceutical sector.
The UK left the EU at the end of January. Despite its official withdrawal, a number of agreements between the EU and the UK have yet to be finalised, including a trade deal. A trade agreement must be in place by December 2020, which could create uncertainty.
The rising stock markets across almost all asset classes are generally positive and look set to continue into the first half of 2020. Monetary policy tightening and unexpected events are therefore the main factors that could alter an otherwise fairly optimistic outlook.
