Investment Comment January 2020

In marked contrast to 2018, equity markets rallied through the final quarter of 2019, with many geographies ending the year at or close to record highs. The gap between two-year and ten-year US treasury yields returned to positive territory and widened, easing the recessionary fears sparked by the inversion of this measure in August. Market confidence was boosted by the announcement of the US-China Phase One trade deal. The deal, due to be ratified on January 15, has been viewed as limited in nature, but the cancellation of additional tariffs due in December and the halving of the September tariffs was well-received by markets.

UK markets climbed +3.29% in December.  This was despite readings for both manufacturing and service PMI survey data falling further into contraction territory, at 47.4 and 48.9, respectively. Retail sales for November also surprised to the downside, falling 0.6% on October, missing market consensus of a 0.3% rise.  The final reading for Q3 GDP growth did however offer some positive news for markets; the annualised figure was revised up to 1.1% from 1%. The election result has stimulated activity in the high-end housing market with sales of homes worth more than £5m up by a third in December from the same month a year earlier. This is significant as movement in this market has historically foreshadowed movement in the broader UK housing market. During the month, Andrew Bailey was announced as the new Governor of the Bank of England. He is the current Chief Executive of the FCA and was the leading candidate to replace Mark Carney. As he has not sat on the Monetary Policy Committee before, his monetary stance remains unknown. Moreover, he has also avoided expressing a view on Brexit which was seen as an important factor in his selection.

The MSCI USA was up +1.18% in December. Preliminary US PMI survey data for manufacturing was marginally down on November but was still comfortably expansionary. Service data was also expansionary and rose on the month.  Like the UK, the final reading for Q3 GDP growth was revised upwards, to 2.1%, from the 2% previously documented. For the period November 1 to December 24, retail sales were up 3.4%, above the 3.1% which had been forecast. November inflation also surprised to the upside at 2.1%, above the Federal Reserve’s target of 2%. However, the Fed’s preferred inflation measure, the core Personal Consumption Expenditure (PCE) held steady at 1.6%.  In light of this and in line with market expectations, the Fed elected to leave its policy rate unchanged at 1.75%.

European markets were also buoyant in December, rising +2.05%. PMI data showed diverging climates for the two key sectors; manufacturing data fell further into negative growth territory while service data hit a multi-month high, pushing further into positive growth territory. Manufacturing data was dampened by Germany as the country failed to continue the upward trend seen in previous months. Inflation in Europe did however pick up, albeit modestly, to 1% from the near three-year low of 0.7% in October.  With the US-China phase one deal now all but sealed, there is concern over the US’s next move to reduce the $180bn European trade deficit.

Japan was the weakest major equity market on the month, rising +0.41%. Consumer sentiment remained depressed in November as retail sales fell 2.1% on the year. Inflation rebounded to a four-month high, helped by an easing in transport deflation. The effect of the consumption tax hike on retail spending and the sluggish state of the manufacturing sector has many commentators suggesting that Q4 growth will slip into negative territory.

Emerging markets regained some of the ground lost to developed markets during the year, rising an impressive +6.35% in December. Retail sales growth in China and industrial production both hit multi-month highs of 8% and 6.2% respectively, suggesting government measures to stimulate growth are beginning to have an impact. A government-led campaign to boost small business financing by 30 percent should also help to keep the country on the upward trend. India’s equity market was less buoyant, marred by unprecedented national protests against a contentious new citizenship law. Brazilian stocks were the standout emerging market performers, as they have been throughout the year, rising 10.82% in the month. With inflation relatively subdued for an emerging market economy and seemingly under control, the Central Bank of Brazil again elected to cut the policy rate to 4.50% in December from 5%.

As anticipated, the ‘phase one’ US-China trade deal announced was a key driver for equity markets in December. Although many developed markets have performed well this year, the US return has been unparalleled, up +26.72%, aided by loose monetary policy and resilient economic growth. Since the election result, we have begun to see a positive re-rating of UK assets, but we do expect there to be continued volatility in 2020 as investors react to the various instalments of the Brexit trade negotiations. More broadly, equity markets have delivered very strong performance following the correction in the final quarter of 2018. Fundamentally, many economies around the world continue to demonstrate late-cycle dynamics. As this equity bull market matures, we expect volatility to increase and we do not foresee the levels of return experienced in 2019 to be reflective of future years. We continue to evolve client portfolios to reflect our views and advocate the importance of a long-term approach to investing.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.