View from the bridge January 2020 - Background

24 Jan 2020

During the latest quarter some of the storm clouds affecting both the global economy and investor sentiment lifted to some degree.

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On the domestic front, the political uncertainty and Brexit parliamentary stalemate that had dogged the whole of the calendar year was resolved with a Conservative win in the general Election with a majority, the scale of which surprised most observers.  Internationally the mood was also lifted by signs that the US and China had made sufficient progress in their trade talks for a “phase one” deal potentially to be signed in January.  Though much work remains to be done on both these topics before uncertainty can be lifted for good, investors reacted by pushing most equity market indices into a strong fourth quarter move that left many at or close to new all-time highs. 
 
Sterling began a bounce well before the election date as opinion polls continued to point towards a lacklustre level of support for the Labour Party and made fresh progress in the immediate aftermath of the result outcome, though some of that latter move was lost after it emerged that the newly re-elected UK Prime Minister Boris Johnson would seek to limit by legislation the length of the transition phase after Brexit to a mere eleven months.  Despite that cooling of support for sterling, it gained approximately 5% during the quarter, as measured on a trade-weighted basis, which for sterling investors took some gloss off the returns achieved by overseas equity markets.

Total Returns to a Sterling Investor
Total returns to a sterling investor

Source: Refinitlv Datastream

Nevertheless, as can be seen from the graph, global markets produced a very strong return during the calendar year as a whole and, even when allowing for the weakness in Q4 2018 that depressed valuations at this stage last year, a more than satisfactory total return of 19% over the two full years.  Global bond markets unsurprisingly struggled to maintain their peak level once investors became less nervous and, in sterling terms, retraced the majority of the ground gained between January and September. Nevertheless despite those foreign currency headwinds the total return for sterling-based investors proved more rewarding than UK cash deposits.
Despite ongoing support and looser monetary policy from a number of Central Banks the latest estimates for the global economic growth continues to look disappointing
As we noted in our last Review, global economic growth for 2019 was proving to be more disappointing than almost any forecast made by economists a year ago and, despite ongoing support and looser monetary policy from a number of Central Banks, the latest estimates for the year as a whole have shown little or no improvement, leaving the likely outcome according to consensus at around 3.1%, well short of the 3.8% recorded for 2018 and 3.9% of 2017.  The shortfall is shared almost equally between the advanced economies and the developing world, with both aggregates between 0.5% and 0.75% below the rate of advance in the prior year.  In the advanced economies, the principal disappointments were seen in Germany and Italy, while the US outcome is now expected to be far short of its 2018 level but not too far below earlier forecasts.  Only Japan has matched its prior year’s (very modest) growth rate. 
 
Among the emerging economies, the larger shortfalls are expected to have been experienced in India, where the 2019 outcome is now forecast to be only 5.5% compared with 7.4% for 2018, and in Russia, whereas China should still report growth of above 6%, albeit slower than the preceding year.  In the final weeks of the year, there has been some edging up of forecasts for growth in the year ahead, in light of the probable ratification of the first phase of the US/China trade talks, such that the prognosis for 2020 is for global growth to be a little better than for the year just ended, with the major proportion of such improvement emanating from the emerging world.

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