Signs of recovery meet an unforeseen threat
January's newsflow lurched from concern, as the United States stumbled towards war with Iran, to optimism over data pointing towards a rebound in growth, and finally to alarm on the outbreak of the Wuhan coronavirus. What began as a month of cautious hope ended with investors reaching for the safety of government bonds, and it set the tone for a year that would prove unlike any other.
Risk assets reverse as the virus spreads beyond China
Stock markets began the month in a positive mood, encouraged by signs of a pick-up in global growth. American equities gained nearly 5% to hit fresh record highs, but news of the coronavirus outbreak caused a swift reversal as investors weighed the potential impact on the Chinese economy and global trade. By month end, US markets were flat in sterling terms, shares in Europe had dipped around 2%, and UK equities relinquished over 3% of December's gains. The move was even more pronounced in emerging markets, which suffered from their reliance on Chinese trade and swung from a 4% gain to a 4% loss over the course of the month. UK government bonds rose by up to 4%.
A brightening mood as employment hits a record
British households showed increasing confidence in their financial situations, and house prices rose by a record amount for January, adding to signs of a brightening mood in the economy since the previous month's general election. Employment stood at a record high, average wages were increasing faster than inflation, and borrowing costs remained close to record lows. The CBI survey of 300 manufacturing firms reported a significant improvement in business optimism, with a record proportion expecting to authorise capital expenditure to expand capacity. There were strong concerns, however, that a shortage of labour could hinder this expansion over the coming year.
Rates held as global growth shows early signs of bottoming
Global composite PMI data offered further signals that growth was bottoming out at the start of 2020. More localised surveys in the United Kingdom and eurozone pointed to a return to expansion, albeit at a subdued rate, while the United States had continued to grow throughout the previous year. Global inflation remained subdued.
Major central banks left interest rates on hold during January. The US Federal Reserve indicated that its policy stance was appropriate and signalled a period of unchanged rates ahead of the presidential election. Despite strong hints earlier in the month that the Bank of England's Monetary Policy Committee would vote to cut rates, expectations were ultimately disappointed when the committee opted for an unchanged stance.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
An unpredictable threat takes centre stage
For the past year at least, investors had been trying to price in the risks surrounding Brexit, geopolitical tensions and the US-China trade dispute. Opposing views attached different probabilities to the outcomes, but at least the risks were visible. The coronavirus was different: a genuine black swan, an unpredictable event with potentially severe consequences. Two-thirds of the Chinese economy remained in shutdown after the extended New Year holiday, already impacting export orders and overseas businesses dependent on Chinese components.
Yet stock markets had rallied since the month end, with US markets hitting record highs once again, suggesting a more sanguine view that the virus was, by and large, contained. The problem for all arguments was the distrust of data coming out of China. Until more useful information emerged on the virus, the backdrop remained one of extended stock markets, though less so in the United Kingdom, supported by signs of subdued growth, extremely loose monetary conditions, and the perception that rates would stay lower for longer.
A black swan is an unpredictable event that has potentially severe consequences.
With cash rates close to zero, there remained a great deal of money looking for an alternative home. The US-China trade talks and Brexit transition negotiations would continue to add to stock market volatility, but the broader search for income continued to underpin demand for risk assets. The key question was whether the green shoots of global growth would be allowed to continue, or whether the coronavirus would prove to be something far more consequential than investors were pricing in.
Our portfolios entered January holding significant cash levels, together with gold as a hedge against falling markets. We remained underweight fixed interest bonds and continued to favour the relative value offered by United Kingdom equities.
Cash held ready to deploy
Around 75% of proceeds from the Woodford Equity Income fund had been returned to portfolios, with the remainder to be released once the less liquid portion of the fund was realised. This effectively increased cash levels, providing capacity to act when better buying opportunities presented themselves.
Monitoring global equities
We were closely monitoring market levels with a view to reducing our exposure to global equities should conditions deteriorate further.
Prefer United Kingdom equities
We remained underweight fixed interest and continued to favour the relative value offered by UK equities, which appeared more reasonably valued than their overseas counterparts. Our portfolios also held gold as a hedge against falling markets.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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