A selection of articles looking back through the markets last month.
Global Market Review
Double-digit gains in 2019
Despite a year that was filled with political and social upheaval – from the trade war between the US and China, through Brexit, to the civil unrest in Hong Kong – many world markets achieved double-digit gains over 2019 as a whole.
“The Conservative Party won the UK General Election”
The Conservative Party won the UK General Election in December, and Prime Minister Boris Johnson’s 80-seat majority in the House of Commons cleared the way for his Brexit deal. MPs voted by 358 to 234 in favour of the EU (Withdrawal Agreement) Bill, which will proceed to Committee Stage in January. The bill was amended to rule out any extension of the transition period, triggering renewed concerns over the possibility of a no-deal Brexit. The FTSE 100 Index edged only 0.1% higher during December, but rose by 12.1% over 2019.
Investors were cheered by the news that the US and China had reached a preliminary trade deal. The “Phase One” agreement reduces or postpones billions of dollars-worth of tariffs and includes a pledge from China to buy large quantities of US agricultural, energy and manufactured goods. Nevertheless, the deal represents only a first step in the process, and there is still much to resolve between both parties. Elsewhere, President Donald Trump was impeached during December for abuse of power and obstruction of Congress. The Dow Jones Industrial Average Index rose by 1.7% over December and by 22.3% during the year.
Germany’s economy is continuing to put a brake on the eurozone as a whole, according to IHS Markit, which found that the country’s manufacturing sector had contracted for an eleventh consecutive month during November. Growth in the services sector ticked up slightly, but was not enough to offset manufacturing’s ongoing slide. Meanwhile, Germany’s central bank warned that the country is likely to continue to suffer lacklustre growth in 2020. The Dax Index crept up by 0.1% in December, but posted annual gains of 25.5% over 2019 as a whole.
Japan’s economy grew more rapidly during the third quarter than initially calculated, expanding at an annualised rate of 1.8% during the period, compared with an earlier estimate of only 0.2%. However, this better-than-expected growth does not reflect October’s increase in consumption tax. The Nikkei 225 Index rose by 1.6% during December, but posted an annual increase of 18.2% over 2019.
Asia & Japan Market Review
Japan’s consumption tax takes its toll
Japan’s economic expansion proved to be better than first calculated during the third quarter of 2019. Growth was boosted by strong capital expenditure and private consumption which helped to mitigate the impact of weaker export activity. The country’s economy grew at an annualised rate of 1.8% during the period, compared with an earlier estimate of only 0.2%. However, this better-than-expected performance does not reflect the impact of October’s increase in consumption tax; in fact, consumer spending fell by 5.1% year on year during October, posting its first decline for 11 months.
“Japan’s Cabinet approved a fiscal stimulus package worth over 13 trillion yen”
The Nikkei 225 Index rose by 1.6% during December, but posted an annual increase of 18.2% over 2019. The broader-based Topix Index rose by 1.3% during the month and by 15.2% during the year, while medium-sized Japanese companies – represented by the TSE Second Section Index – climbed by 0.5% during December and by 16.6% over 2019.
The Bank of Japan’s (BoJ’s) quarterly Tankan survey found that confidence amongst large Japanese manufacturers deteriorated over the three months to December. Optimism fell to its lowest level for over six years, dampened by the ongoing trade conflict between the US and China and a wider global economic slowdown.
Japan’s Cabinet approved a fiscal stimulus package worth over 13 trillion yen during the month in a bid to shore up slowing economic activity. In a statement, Prime Minister Shinzo Abe said: “These economic measures are founded on the following three pillars: recovery and reconstruction from disasters … support to people seeking to overcome the downward risks of the economy, and investing in the future and maintaining and improving economic vitality … beyond next year’s Olympic and Paralympic Games”.
Elsewhere in the region, Australia’s third-quarter economic growth came in below the long-term average. While the country’s economy expanded at an annualised rate of 1.7% during the period, quarter-on-quarter growth slowed from 0.6% in the second quarter to 0.4%. Net exports made up 0.2% of this quarterly growth, but government spending was primarily responsible for the balance. This factor – alongside an increase in the household savings ratio to 4.8% – suggests that, despite tax cuts and an increase in household gross disposable income, Australian households are reluctant to spend. During December, the ASX All Ordinaries Index fell by 2.1% as devastating wildfires took their toll. Over 2019 as a whole, the index rose by 19.1%.
Emerging Markets Review
US and China agree “Phase One” trade deal
Investor sentiment was lifted during December by the news that the US and China had reached a preliminary “Phase One” trade agreement in its long-running trade war. The US will reduce or postpone existing tariffs on Chinese imports, while China intends to reduce tariffs for all its trading partners on 859 products, and will cut tariffs on over 8,000 other products. The news was well received not only in China and the US, but also in many other countries that have been affected – directly or indirectly – by the conflict.
“The US will reduce or postpone existing tariffs on Chinese imports”
China’s exports fell at an annualised rate of 1.1% during November and shipments to the US dropped by 23.3% as the trade conflict between the two countries continued to take its toll. Meanwhile, imports rose by 0.3% year on year. However, following the news of the “Phase One” trade deal, China’s manufacturing activity strengthened in December as relations between the US and China began to show some signs of improvement. Elsewhere, profits at industrial companies picked up in November, rising by 4.4% year on year, and retail sales rallied in November, posting their fastest growth since June. The Shanghai Composite Index rose sharply following the trade deal’s announcement and ended December 6.2% higher. Over 2019 as a whole, the benchmark index rose by 22.3%.
In a bid to support economic growth, policymakers at Brazil’s central bank voted unanimously to cut its key Selic rate from 5% to 4.5% during December against a backdrop of benign inflation. The Selic rate was as high as 14.25% in 2016. Brazil’s central bank upgraded its economic growth forecast for 2020 from 1.8% to 2.2%, although this improvement will depend on further advances in economic reforms. Inflation is expected to reach 3.5% in 2020 and 3.4% in 2021. Looking ahead, the central bank expects its approach to monetary policy to remain cautious. The Bovespa Index rose by 6.8% during December and by 31.6% during the year.
India’s industrial production maintained its contraction into October, shrinking at an annualised rate of 3.8%. Annualised growth in inflation continued to rise in November, climbing from 4.62% in October to 5.54% and driven up by sharp increases in food prices, which surged by more than 10%. The CNX Nifty Index rose by 0.9% in December and by 12% over 2019 as a whole.
Europe Market Review
Germany puts the brakes on the eurozone
The eurozone’s economy remained sluggish in December as improved activity in the services sector failed to mitigate a deepening contraction in the manufacturing sector. Output amongst the region’s manufacturers posted its sharpest decline since October 2012 during the month, undermined by Germany’s ongoing slowdown. Germany’s economy is continuing to put a brake on the eurozone as a whole, according to IHS Markit: although optimism improved in Europe’s largest economy, business activity in Germany posted its fourth consecutive monthly decline, while factory production dropped at one of its steepest rates for seven years. Growth in new factory orders across the eurozone remained negative and new job creation has fallen to its lowest level for more than five years. IHS Markit warned that further deterioration in manufacturing jobs could start to spill over into the services sector.
“Once and for all, I’m neither dove nor hawk” (ECB President Christine Lagarde)
Meanwhile, Germany’s central bank believes the country’s anaemic economic growth is likely to continue into 2020. Export activity is expected to rally, but the Bundesbank believes that consumers will remain cautious, dampened by slow growth in disposable income. Generally, the Bundesbank believes that risks to economic growth are tilted to the downside and could extend the downturn in Germany’s industrial sector. The Dax Index edged up by 0.1% in December, but rose by 25.5% over 2019 as a whole.
December saw Christine Lagarde preside over her first policy meeting after taking over as President of the European Central Bank (ECB). Policymakers expect to maintain interest rates at their current historic lows, but President Lagarde said that a forthcoming review of the central bank’s strategy could result in some expansion of the measures used to support growth and achieve price stability, although the current suite of stimulus measures are likely to remain in place for now.
The ECB predicts the eurozone’s economy will grow by 1.2% in 2019 and 1.1% in 2020, while inflation is forecast to reach 1.2% this year and 1.1% next year – considerably below the central bank’s target of below but close to 2%.
President Lagarde emphasised “Once and for all, I’m neither dove nor hawk, and my ambition is to be this owl, that is often associated with a little bit of wisdom”, and asked observers not to “over-interpret … second-guess … (or) cross-reference” her actions with those of her predecessors, saying “I’m going to be myself and therefore probably different”.
Global Bond Market Review
Investors eye riskier assets in December
A mood of tentative optimism blunted the attractions of government bonds during December. Yields generally rose as investors became more sanguine over the possibility of a short-term resolution to Brexit-related uncertainties following Boris Johnson’s decisive victory in the UK General Election. Meanwhile, the trade war between the US and China was put on pause as a preliminary “Phase One” trade deal was announced.
“The benchmark JGB yield rose into positive territory for the first time since March”
The US Federal Open Market Committee (FOMC) and the European Central Bank (ECB) both kept their key interest rates unchanged during December. In Sweden, however, the Riksbank – which was the first major central bank to reduce interest rates to below zero back in February 2015 – increased its key rate from -0.25 to 0%, becoming the first country to bring an end to its cycle of negative rates. In contrast, central banks in Japan, Switzerland and Denmark continued with their negative-rate monetary policy.
The benchmark Japanese government bond (JGB) yield rose into positive territory for the first time since March, but subsequently subsided to end December at -0.02%. The yield on the benchmark US Treasury bond rose from 1.78% to 1.92% during December, having begun 2019 at 2.69%.
While concerns about Brexit subsided slightly – for the time being, at least – broader fears over the outlook for the European economy were exacerbated by disappointing economic data releases from Germany. The Bundesbank warned that Germany’s economic growth is likely to remain lacklustre into 2020 and the outlook for the country’s industrial sector is still weak. Despite this, the benchmark German government bond yield strengthened from -0.59% to -0.47% over December; having begun the year at 0.17%, the yield on the Bund fell into negative territory in May 2019. Elsewhere, the benchmark French government bond yield climbed from -0.40% to -0.30% in December, after starting 2019 at 0.65%, and the yield on the benchmark Italian government bond rose from 0.74% to 0.75% in December, having begun 2019 at 2.62%.
The global credit outlook will be influenced by a combination of slowing economic growth, low interest rates, and unprecedented levels of indebtedness, according to credit ratings agency Fitch, which believes that a sharp correction in equity markets could be a potential catalyst for a greater-than-expected downturn. Fitch warned that long-term valuations for US equities are close to historic highs, fuelling the possibility of a correction.
UK Bond Market Review
Optimism returns as 2019 ends
Investor confidence rallied during December following the Conservative Party’s decisive victory in the General Election. Boris Johnson’s 80-seat majority helped to reassure financial markets that Brexit would finally go through on 31 January 2020, although an amendment ruling out an extension of the transition period beyond 31 December 2020 raised fresh concerns over the possibility of a no-deal Brexit further down the line.
“Sterling rose to its highest level against the US dollar since March”
A return of confidence is likely to reduce the attractions of lower-risk assets such as UK government bonds, and demand for gilts fell during December, driving the yield on the benchmark gilt as high as 0.87% – its highest level since June. Over December as a whole, the yield on the benchmark UK gilt climbed from 0.56% to end the year at 0.76%, having started 2019 at 1.26%. Meanwhile, sterling rose to its highest level against the US dollar since March, ending 2019 at US$1.33.
Credit ratings agency Fitch affirmed its “AA” rating for the UK, citing the increased probability that the UK will quit the EU with a Brexit deal on 31 January 2020. Nevertheless, Fitch retained its “negative” outlook, reflecting the continued uncertainties in the relationship between the UK and EU as the two sides enter the transition period.
Andrew Bailey was appointed to be the next Governor of the Bank of England when current Governor Mark Carney steps down on 15 March 2020. At present, Mr Bailey is Chief Executive of the Financial Conduct Authority (FCA).
The UK’s annualised rate of inflation was unchanged in November compared with October at 1.5%, representing the slowest pace of year-on-year price increases for three years. Although prices for food and non-alcoholic beverages rose, this increase was offset by a decline in the price of and tobacco and hotel accommodation. Having contracted month-on-month during August and September, UK economic growth was flat in October, dampened by a weak performance from the manufacturing and construction sectors.
Job losses in the UK manufacturing sector grew at their fastest rate since September 2012 during November as companies attempted to cut costs. According to IHS Markit, manufacturers are being “squeezed between a rock and a hard place”. The manufacturing sector contracted for a seventh straight month during November as companies reduced inventory levels following pre-Brexit stockpiling ahead of the 31 October deadline.
UK Equity Market Review
December provided a turning-point for the UK as the Conservative Party won the General Election. Prime Minister Boris Johnson succeeded in securing an 80-seat majority in the House of Commons, clearing the way for his Brexit deal. MPs voted by 358 to 234 in favour of the EU (Withdrawal Agreement) Bill, which will proceed to Committee Stage in January. The bill has been amended to reject any extension to the transition period, sparking fresh concerns over the possibility of a no-deal Brexit. The transition period is scheduled to end on 31 December 2020.
The CBI warned that British business had “had enough of uncertainty”
New President of the European Council Charles Michel tweeted: “EU is ready for the next phase. We will negotiate a future trade deal which ensures a true level playing field”. Meanwhile, US President Donald Trump tweeted: “Britain and the United States will now be free to strike a massive new Trade Deal after BREXIT. This deal has the potential to be far bigger and more lucrative than any deal that could be made with the EU.”
The pound surged to its highest level since March against the US dollar, but dipped amid fresh concerns over the possibility of a no-deal Brexit before rallying again to end the year at US$1.33. The Confederation of British Industry (CBI) warned that British business had “had enough of uncertainty”, and urged the Government to agree a good trade deal “as quickly as possible”, saying “speed and ambition can go hand-in-hand if the right approach is taken”.
Medium-sized companies outperformed their blue-chip counterparts during December and over 2019 as a whole; A strong pound drives down sentiment towards blue chips, which tend to generate a sizeable proportion of their earnings overseas, so sterling’s rally boosted the FTSE 250 Index – which is more domestically focused than the FTSE 100 Index – to a new all-time high. The FTSE 100 Index climbed by only 0.1% during December, but rose by 12.1% over 2019. In comparison, the FTSE 250 Index rose by 5.1% in December and by 25.0% over 2019.
Although the Conservative Party’s sizeable majority in the House of Commons is likely to reduce political volatility, credit ratings agency Fitch believes that Prime Minister Boris Johnson will still have to balance the concerns of voters in northern England and the midlands with the Conservative Party’s “hardline” Eurosceptic element when negotiating with the EU.
UK Equity Income Market Review
A defining moment for Brexit
The UK General Election proved to be a defining moment for Brexit in the UK as Boris Johnson’s decisive victory – with an 80-seat majority – paved the way for his Brexit deal to clear the House of Commons. During December, the FTSE 100 Index edged 0.1% higher, climbing by 12.1% over 2019, whereas the FTSE 250 Index rose by 5.1% in December and by 25.0% over 2019. The British Chambers of Commerce (BCC) expects UK economic growth to slow from 1.3% in 2019 to 1% in 2020, dampened by political and economic uncertainty and representing its weakest growth since 2009.
“UK equity yields eased over 2019”
UK equity yields eased over 2019 as a whole. Over December, the yield on the FTSE 100 Index declined from 4.47% to 4.36%, having begun 2019 at 4.68%. Meanwhile, the FTSE 250 Index’s yield fell from 3.07% to 2.95%, after beginning the year at 3.39%. In comparison, the benchmark UK government bond yield climbed from 0.56% to end the year at 0.76%, having started 2019 at 1.26%.
Over 2019 as a whole, the best-performing FTSE UK sectors were leisure goods, technology hardware & equipment, construction & materials, electronic & electrical equipment, and financial services. The worst-performing sectors included automobiles & parts, oil equipment & services, industrial metals & mining, and fixed line telecommunications.
Water regulator Ofwat revealed its decision on the prices that the UK’s water companies can charge their customers over the next five years. The regulator intends to reduce the returns that the water companies are allowed to generate from their investments, which will drive down dividend payments. Ofwat reduced the cost of equity – which controls dividend payouts – from 4.5% to 4.2%.
Headline dividend growth rose to record levels during the third quarter of 2019, according to Janus Henderson’s Global Dividend Index, boosted by large special dividend payouts from Royal Bank of Scotland, and from mining companies Rio Tinto and BHP. However, the underlying rate of growth – which does not include special dividends – was substantially slower at only 0.6%, dragged down by a sizeable dividend cut from Vodafone, weakness in the pound, and a lack of dividend growth from major UK multinationals such as Shell and HSBC. On an underlying basis, Janus Henderson found that UK dividend growth continues to lag behind the global average.
US Market Review
Signs of progress in the long-running trade conflict between the US and China lifted investor sentiment in the US and around the world during December. The US and China announced a preliminary trade deal that will reduce or postpone existing US tariffs on Chinese imports, whilst China has pledged to buy large amounts of US goods. The news drove up US share prices to record levels; however, the “Phase One” trade agreement represents an early stage in a longer and more complex process. Despite this, President Donald Trump tweeted: “We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election”.
“The “Phase One” trade agreement represents an early stage in a longer and more complex process”
The Dow Jones Industrial Average Index rose by 1.7% over December and by 22.3% during the year. The broader-based S&P 500 Index climbed by 2.9% over the month and by 28.9% over the year. The technology-heavy Nasdaq Index rose by 3.5% in December and by 35.2% over 2019.
Trade proved to be a major theme for the US throughout December. The US, Canada and Mexico reached an accord on the United States-Mexico-Canada Agreement (USMCA), a new trade deal that replaces the North American Free Trade Agreement (NAFTA). Meanwhile, President Trump announced that he would impose tariffs on steel and aluminium imports from Brazil and Argentina, claiming that both countries had been engaged in devaluing their currencies. He went on to urge US policymakers to cut interest rates, tweeting : “The Fed should lower rates (there is almost no inflation) and loosen, making us competitive with other nations, and manufacturing will SOAR!”
Elsewhere, President Trump threatened to impose tariffs on US$2.4 billion-worth of French goods in reaction to France’s new Digital Services Tax (DST). The DST will affect US technology companies such as Google, Apple, Facebook and Amazon.
President Trump was impeached during December: the US House of Representatives voted by 230 votes to 197 in favour of impeaching the President for abuse of power, and by 229 votes to 198 in favour of impeaching him for obstruction of Congress. The Senate will hold a trial in the New Year; however, as the Senate is currently controlled by the Republican Party, President Trump is likely to remain in office. In a statement, the White House condemned the impeachment as “shameful” and stressed that President Trump is “confident that he will be fully exonerated”.