Financial Bulletin – January 2020

Overview

Despite some opinion polls pointing to a tightening General Election race, Boris Johnson’s Conservatives in fact secured their largest majority since the 1980s.

The result means that the UK will now almost certainly leave the EU at the end of January.

In the days following the Election, the FTSE 250 was propelled to a record high as investors generally reacted positively to the outcome.

In contrast to the eventfulness of the UK, other regions of the world had a quieter end to the year.

Both the European Central Bank and US Federal Reserve made no changes to their respective interest rates during their final meetings of 2019.

Whilst the US economy continued to recover from its recent trough, the Eurozone and UK economies remained in the doldrums.

Over the last 6 months the FTSE 100 gained around 0.6%, whilst the Euro Stoxx 50 and S&P 500 gained around 7.1% and 8.9% respectively (all in price terms). 

The broad Emerging Markets index fared less well than many of its developed market counterparts but returned 4.75% (in US$ price terms).

The Japanese Nikkei 225 gained approximately 8.9% (in price terms).

Most government bond yields remained fairly flat over a 6 month period but have risen from the lows reached in late summer.

US Economic News

Signs that the US economy may have moved on from its lowest point continued through December.

The large services sector improved at the fastest rate for 5 months according to surveys, partly on the back of better foreign demand.

Moreover, despite the unemployment rate being at historically low levels, the economy keeps adding jobs at an impressive rate; November saw the largest increase in new jobs since January.

That said, the recovery should not be overstated and business confidence regarding the future remains subdued.

One of the main factors undermining business confidence is the ongoing trade dispute with China.

Towards the end of the month President Trump announced that he would sign a ‘phase one’ trade deal with China during January. However, some have questioned whether this will be enough to remove the uncertainty.

The US Federal Reserve kept interest rates on hold at its final meeting of 2019.   

UK Economic News

The result of the UK General Election was a surprise to many as the Conservatives won a significant majority.

It means that the UK will now almost certainly officially leave the EU at the end of January, and will then begin the ‘transition’ period during which EU law will continue to apply.

Although the immediate uncertainty has been removed, there is still ambiguity concerning what the future trading relationship will look like. The exact rules on how we trade with Europe will have a significant impact on businesses.

Whilst the election campaign was playing out, the economy remained fairly subdued.  

The dominant services sector improved modestly during December but was effectively flat.

In contrast, however, the manufacturing and construction sectors deteriorated significantly, with the former contracting at the one of the sharpest rates since 2012, and the latter contracting at one of the sharpest rates since 2009.

Some of this deterioration may be down to the uncertainty of the General Election, but there is little doubt that the two sectors are fundamentally weak.

Average wage growth, which has been a bright spot for the economy for several years, rose by 3.2% in the three months to October. This was less than the 3.4% which many economists had expected.  

Also during the month Andrew Bailey was appointed as the next Governor of the Bank of England; he is seen as an experienced ‘safe pair of hands’.

Eurozone Economic News

Although the Eurozone economy remained subdued during December, there were some provisional signs of recovery.

The latest surveys suggested the region improved at the strongest rate for four months, led by Germany which returned to growth.

However, the rate of improvement was still one of the slowest since 2013. 

As is the case in the UK, it is the services sector which is holding the economy above water, whilst the manufacturing sector remains in a weak state.

Growth in the third quarter of the year was confirmed as 0.2%, with some economists forecasting that growth in the fourth quarter may only be 0.1%.

At its final meeting of 2019 the European Central Bank left interest rates unchanged, and reiterated that they are likely to remain at historically low levels for some time.

Wider Economic News

The outlook for Chinese manufacturing continued to brighten during the month as a closely watched survey suggested the fifth straight month of improvement.

The services sector also continued to expand.

However, the economy remains in a fragile position, and any further deterioration in trade between the US and China is likely to have a significant impact.

Elsewhere, the Japanese manufacturing sector remained in a subdued state and actually deteriorated at a faster rate during December.

However, in what was one rare piece of positive news, growth in the third quarter was revised higher to 0.4%.

Financial Markets and Corporate News

Most major stock markets have made solid gains over the past 6 months.

Whilst the UK stock indices have generally lagged their developed counterparts, the FTSE 250 rallied in the aftermath of the General Election result to reach an all-time high.

Over 6 months the FTSE 100 gained around 0.6%, whilst the Euro Stoxx 50 and S&P 500 gained around 7.1% and 8.9%, respectively (all in price terms).  

Japan’s Nikkei 225 returned approximately 8.9% (in price terms).

The broad Emerging Markets index fared less well than some of its developed markets counterparts and returned 4.75% (in US$ price terms).

Over the same 6 month period UK Gilts have been volatile on the back of political uncertainty, whilst 10 year US Treasury bond yields have fallen as interest rates fell.

The Investment Association (IA) UK Gilts sector returned 1.44%, the IA Corporate Bond sector returned 2.80%, whilst the Sterling High Yield sector returned 2.95%.

Summary of Key News:

  • The UK General Election resulted in a large Conservative victory.
  • The UK economy remains fragile.
  • The US economy continued to recover.
  • The Eurozone showed only tentative signs of a turnaround.
  • The Chinese manufacturing sector picked up.
  • The Japanese economy remains in the doldrums.  

Financial Markets:

  • Over 6 months the FTSE 100 gained around 0.6%, whilst the Euro Stoxx 50 and S&P 500 gained around 7.1% and 8.9%, respectively (all in price terms).
  • The FTSE 250 reached a new record high point.
  • The Japanese Nikkei 225 returned approximately 8.9% (in price terms).
  • The broad emerging markets index returned approximately 4.75% (in US$ terms).
  • The (IA) UK Gilts sector returned 1.44%, the IA Corporate Bond sector returned 2.80%, whilst the Sterling High Yield sector returned 2.95%.

Source: FE Analytics

Outlook

Despite some signs that the world economy may be past the worst of the slowdown, most regions of the world remain fragile, and Central Banks have relatively little fire power left.

The attention of many investors has turned to governments and whether they increase spending in a bid to boost their respective economies.

In this respect the stated intention of both the Prime Minister and Chancellor to increase infrastructure spending could be significant. Investors will be waiting for more details with interest.

Whilst most regions of the world have been weak, equity markets have generally continued to rise despite slower earnings growth. This means that many equity markets are now more expensive than a year ago.

For now, investors seem content that the world economy can be revived and that current equity market valuations can be justified.

Back in the UK, the Conservative majority in the House of Commons means that businesses now have certainty that the country will be leaving the EU. However, there remains significant uncertainty as to what the future trading relationship will look like.

For as long as a new trading relationship is not agreed, it is unlikely that foreign investors will return to the UK in great quantities.