Global Markets to 06 January 2020
- Many investors were expecting 2019 to be volatile and unrewarding, particularly after the flash crash that hit the global equity markets in December 2018.
- If there were ever a time when the global stock markets would be more uncertain and unpredictable, it was surely going to be in 2019. But the central banks have become more responsive when risks are on the horizon.
- Global stock markets post their best year returns since the aftermath of the financial crisis: the MSCI World Index records a capital gain of over 25%.
- In the UK, the FTSE 100 Index registers a double-digit gain for the year, despite Brexit. Wall Street and many international markets deliver superior returns.
- Sovereign bond yields fall into negative territory, while crude oil and gold bullion prices rise on geopolitical risks, shored up by their safe-haven status.
- As we enter a new decade, the pace of technological advancement will gain further momentum, creating numerous challenges across all sectors and throughout the global economy.
Global Market Summary
Many global investors were expecting 2019 to be a volatile and unrewarding year, particularly after the flash crash that hit the global equity markets in December 2018. With fears of higher interest rates, the effects of China’s economic slowdown, the escalation of a damaging trade war between the US and China and ongoing Brexit uncertainty, the stage looked very much set for a difficult year. All of these factors initially drove investors out of risk assets – such as equities – and into safe-haven assets, such as bonds, gold and certain designated currencies.
If there were ever a time when stock markets were going to be more uncertain and unpredictable, it was surely going to be in 2019. But what the last decade demonstrated is that in difficult times, the world’s leading central banks are more responsive to risks when they first appear. These institutions quickly become white knights, changing allegiances and adopting a more dovish approach in relation to any future interest-rate policies.
Furthermore, global investors who have been prepared to embrace higher levels of risk during times of anxiety have been handsomely rewarded. However, what has come as a surprise – even to such investors – is the extent to which stock markets around the world have reacted to supposedly bad news and rallied strongly throughout the year.
Indeed, investors have shrugged off those trade war tensions and ignored warnings of slower economic growth, resulting in the world’s stock markets posting their best year since the aftermath of the financial crisis a decade ago. The MSCI World Index, which tracks stocks across the developed world, recorded a capital gain of over 25% in 2019, driven by a surge in the stock prices for many of the US technology giants and a strong recovery in eurozone and Asian stocks.
Closer to home, while Brexit continued to worry investors, the UK’s leading blue-chip index – the FTSE 100 – registered a capital gain of 12%. This was its best performance in three years, with a late flurry following the Conservative Party’s resounding general election win in December. Whilst the FTSE 250 (ex Investment Trust) Index returned an astonishing 26% capital gain.
The Labour Party suffered its worst election defeat since 1935, handing the Conservatives an 80-seat majority in the House of Commons. This caused sterling to rally strongly, before trending back down once the post-election euphoria had dissipated. Nevertheless, sterling closed out the year higher than it had been at the start of 2019.
The UK stock market fared relatively poorly compared to many of the international markets. Wall Street in particular sky-rocketed, with the S&P 500 and NASDAQ indices recording gains of 28% and 35%, respectively. The NASDAQ index most definitely benefited considerably from the stellar returns registered by companies such as Netflix, Facebook, Amazon and Apple, which saw its shares rise by around 85% over the year.
In Europe, we saw a similar story with Germany’s DAX and France’s CAC indices, both posting returns upwards of 25%. In Japan, the Nikkei index gained 18%, boosted by prospects of a new stimulus package from the Japanese government. And in China, the CSI Index produced the strongest return of any of the world’s major stock markets, surging by a staggering 36%.
Two major factors drove this Chinese stock market rally: firstly, the Chinese authorities readiness to provide a boost to the country’s economy if needed, and secondly, the likelihood of a trade deal being signed with the US, dispelling any fears of further economic weakness that might be created by future hostilities between the two global superpowers.
Despite an abundance of already-referenced negative catalysts, together with warnings from the International Monetary Fund about the global economy being in its weakest state since the financial crisis and the possibility of a geopolitical confrontation between the US and Iran, the markets have actually reacted positively to bad news and negatively to good news – which is highly irregular.
Once again, when it became clear that central bank policy (particularly in the US) was going to remain loose, and after the Federal Reserve Bank had cut interest rates three times in 2019 before expanding its balance sheet once more, global investors once again embraced risk assets, albeit with some trepidation.
In the fixed interest markets, the pool of sovereign bonds with negative yields expanded to around US$17 trillion in 2019, according to Bloomberg data. There was also an inversion of the yield curve in the US, which in the past has invariably signalled the onset of a recession at some point over the ensuing 18 to 24 months. Besides, with inflation-adjusted real rates already in negative territory, western government bonds have no real appeal.
That is not to say that bonds per se are not investible; there is still some appeal in high-quality investment grade, high-yield and emerging market debt, along with inflation-linked paper.
In the commodity markets, the price of crude oil has risen over the year on the back of geopolitical risks as hostilities have mounted between the US and Iran. Furthermore, OPEC and its oil-producing allies have neared completion of a third year of oil-supply cuts to support the oil price.
The beginning of the year saw the assassination of Iranian Major General Qasem Soleimani in a US airstrike. Iranian President Hassan Rouhani has promised members of the dead commander’s family – seen by the White House as a terrorist – that Americans will “feel the impact” of their “criminal act… for years to come”.
From a market perspective, there are two possible short-term scenarios that might affect the different asset classes. Firstly, the price of crude oil is likely to rise, reacting to the prospect of retaliatory action (over the last 12 months, Iran has shot down US planes and attacked cargo ships and oil fields).
Secondly, while the global equity markets have reacted nervously to the assassination, they will want to put it behind them quickly – many of last year’s uncertainties, such as trade tensions, talk of tighter monetary policy and Brexit have all either been resolved, or positive proposals have been put on the table.
Neither country will want the situation to further escalate, particularly since Iran is already bearing the brunt of economic sanctions and the US economy has suffered from Chinese trade tariffs. This is also an election year for President Trump. Since his objective is to fashion a campaign based on his being the right person for a second term in the White House, any mishandling of a geopolitical event such as this could spell the end of his chances.
Furthermore, the price of gold has jumped up to US$1500 per troy ounce – up nearly a fifth over the last year, its biggest annual rise in nearly a decade – and could rise further in 2020. Palladium also hit a series of record highs throughout the year, as demand for the precious metal used in car exhaust systems exceeded supply.
These are unquestionably extraordinary times for global investors as far as the economic, political and financial backdrop is concerned. Heightened geopolitical risks, trade tensions, the world’s indebtedness and low policy rates have driven many investors into some unconventional asset allocations, resulting in many parts of the market becoming overvalued. Although challenges lie ahead, we nevertheless believe that the coming year will provide global investors with further investment opportunities.
Brexit and the impending US presidential elections are likely to continue to impact the markets throughout 2020, against a backdrop of continuing low interest rates, inflation and subdued growth. It may, however, be more pertinent to reflect on the forthcoming decade, given that the demographic changes that it will see will affect all of us, regardless of age.
The current pace of technological advancement has been astonishing. But this will gain further momentum over the next ten years, creating numerous challenges across all sectors of the global economy. While disruptive threats seem to be on the rise, the speed at which disruptors are able to enter the market and challenge their incumbents will only increase.
Some industries will evidently be challenged over the next decade. They will need to learn to embrace change quickly, or else fail or run the risk of bankruptcy. The constantly evolving technology sector is one of the drivers of an ever-changing world. Artificial intelligence and virtual reality are likely to become the norm over the next few years. Similarly, environmental disruption and sustainable investing will become mainstream in global investors’ portfolios. Numbers of global consumers will increase dramatically over the coming decades, while the challenges posed by an ageing population will need to be addressed.
Our financial planning and investment teams will continue to address all of these important issues over the coming years. As far as 2020 is concerned, the equity markets will probably once again be quite generous to investors. But discipline will still be required in one’s investment approach: preference should be given to investing in companies of the future, rather than in companies of the past.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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