A selection of articles looking back through the markets last month.
Global Market Review
Coronavirus hits investor sentiment
Investor sentiment was initially buoyed in January as the US and China signed their interim trade deal, driving US share indices to new all-time highs. However, major global equity markets ultimately ended the month in negative territory against a backdrop of mounting concern over the spread of the coronavirus, which in turn triggered worries about the longer-term impact on China’s flagging economic growth.
“After years of political wrangling, the UK finally quit the EU at 11pm on 31 January”
After years of political wrangling, the UK finally quit the EU at 11pm on 31 January. As the UK entered the “transition” phase, Prime Minister Boris Johnson reiterated that the UK would not extend this Implementation Period beyond 31 December 2020, and the Government now has 11 months to negotiate the UK’s new relationship with Europe. Elsewhere, the UK experienced its worst-ever year for retail sales in 2019, according to the British Retail Consortium (BRC), which also reported the first year to show an overall decline. The FTSE 100 Index fell by 3.4% during January.
The US and China signed their “Phase One” trade deal designed to relieve the long-running trade conflict between the two nations. The US economy grew by 2.3% during 2019, representing its slowest annual growth since 2016. The US Federal Reserve believes that global growth might be stabilising, partly because of “diminished” uncertainties around the issue of trade. The Dow Jones Industrial Average Index fell by 1% during January.
The eurozone’s rate of inflation increased from 1% year on year in November to 1.3% in December, reaching its highest level since June. Nevertheless, it remains well below the European Central Bank’s (ECB’s) target rate of below, but close to, 2%. The ECB launched a review of its monetary policy strategy during the month, triggering speculation that the central bank might move to change its inflation target. Meanwhile, the eurozone’s economy grew by only 0.1% during the final quarter of 2019. The Dax Index fell by 2% during January, while the CAC 40 Index posted a 2.9% drop.
Asia & Japan Market Review
Japan’s policymakers remain cautious
Although the Bank of Japan (BoJ) raised its forecast for economic growth in the fiscal year 2020 from 0.7% to 0.9%, policymakers are not yet ready to scale back their current stimulus programme, citing continued risks posed by overseas developments and the longer-term impact of the recently increased consumption tax. The BoJ expects domestic demand to help offset weak exports and industrial output.
“Australia’s Government announced a bushfire relief fund totalling US$2 billion”
The International Monetary Fund (IMF) upgraded its forecast for Japan’s economic growth this year from 0.5% to 0.7%, highlighting the impact of December’s stimulus measures. Looking further ahead, Japan’s rate of growth is predicted to slow to 0.5% as the impact of fiscal stimulus dies away. The Nikkei 225 Index fell by 1.9% during January, while the Topix Index dropped by 2.1%. The TSE Second Section Index – which represents medium-sized companies – fell by 2.6%.
Exports posted their 13th consecutive monthly decline in December as weak demand for Japanese products took its toll. Exports fell at an annualised rate of 6.3% during December; the rate of contraction slowed as the “Phase One” trade agreement between the US and China raised hopes of an improvement in demand. White shipments to Asia fell by 3.6%, exports to China posted a small increase of 0.8%; meanwhile, exports to the US posted an annualised drop of 14.9%.
Australia’s Government announced a bushfire relief fund totalling US$2 billion amid intensifying concerns over the economic impact of the fires as businesses and tourism continued to suffer. Consumer sentiment in Australia declined at an annualised rate of 6.2% in January, according to a survey undertaken by the Melbourne Institute and Westpac Bank. Nevertheless, after a dismal December, Australian share prices moved higher during January, boosted by hopes surrounding the US/China trade deal, but gave up some of their gains towards the end of the month amid fears over the Coronavirus. Over January as a whole, the ASX All Ordinaries Index rose by 4.7%.
South Korea’s economic growth continued to lose momentum over 2019, dampened by the US/China trade conflict and a decline in demand for semiconductors. Having expanded by 3.2% in 2017 and 2.7% in 2018, the country’s economy grew by 2% in 2019. Although exports rose by 1.5% overall in 2019, this was significantly lower than 2018’s rate of 3.5%. The Kospi Index fell by 3.6% during January.
Emerging Markets Review
Coronavirus hits markets
January proved to be a month of two halves for China. Although investor sentiment received a boost from the “Phase One” trade agreement with the US, optimism proved short-lived as concerns grew over the spread of the Coronavirus. The Shanghai Composite Index fell by 2.4% during January, but was in fact shut from 23 January to the end of the month as China’s government extended the Lunar New Year holiday in a bid to curb the spread of infection. As the Coronavirus continued to take hold, transport links were shut down and many companies reduced or suspended their business, triggering worries over the impact on global supply chains.
“China’s government extended the Lunar New Year holiday in a bid to curb the spread of infection”
Elsewhere, China’s industrial production picked up sharply in December from 6.2% to 6.9%, reaching its highest levels since March 2019. However, China’s economy continued its slowdown, posting growth of 6.1% for 2019.
The International Monetary Fund (IMF) sharply downgraded its estimation for India’s economic growth in 2019 from 6% to 4.8% during January. The downgrade also affected the IMF’s global forecast, which was trimmed from 3.4% to 3.3% for this year. The rate of India’s expansion has slowed more sharply than expected, curbed by “stress” in the non-bank financial sector and weak credit growth. Growth is expected to pick up to 5.8% in 2021, lifted by monetary and fiscal stimulus measures and “subdued” oil prices. Over January, the CNX Nifty Index fell by 1.7%.
According to credit ratings agency Fitch, general government debt and deficits in many Latin American economies are actually larger now than they were in 2008, having been driven up by a protracted period of “tepid” growth and sluggish recovery in commodity prices. Latin American economies are vulnerable to a worse-than-expected global slowdown because of their limited fiscal capacity to support growth. Argentina and Ecuador are considered to be particularly exposed; Brazil remains vulnerable because of its high public debt and large deficit, but its future resilience will depend partly on its leaders’ ability to push through reform. During January, President of Brazil’s central bank Roberto Campos Neto warned that Brazil’s economy still requires a cautious approach to monetary policy. The future path of the country’s policy will continue to depend on the economic developments, the balance of risks and the outlook for inflation. The Bovespa Index fell by 1.6% over the month.
Europe Market Review
ECB launches review of its monetary policy strategy
The eurozone’s economy expanded by only 0.1% during the fourth quarter of 2019, dragged down by the impact of global trade tensions caused by the longstanding conflict between the US and China. Investor sentiment was boosted during January by the news that the two countries had signed their “Phase One” trade deal, but optimism was quickly suppressed by mounting concerns over the spread of the coronavirus and the potential impact on the global economy. The Dax Index fell by 2% during January, while the CAC 40 Index declined by 2.9%.
“How we measure inflation is clearly something that we need to look at” (ECB President Christine Lagarde)
Having grown by 0.3% during the third quarter, France’s economy contracted by 0.1% in the fourth quarter, dampened by weak export activity and the impact of companies running down their inventories. Meanwhile, Italy’s economy shrank by 0.3% during the period as companies unwound their inventories.
Although the annualised rate of inflation in the eurozone rose from 1% in November to 1.3% in December – achieving its highest level since June 2019 – it remains significantly lower than the European Central Bank’s (ECB’s) target rate of below but close to 2%. The ECB commenced a review of its monetary policy strategy, raising speculation that its inflation target might be changed. ECB President Christine Lagarde said: “How we measure inflation is clearly something that we need to look at”. The central bank is widely expected to leave its current monetary policy stance unchanged until the review has been concluded.
The International Monetary Fund (IMF) expects the eurozone’s economic growth to pick this year, albeit at a slightly slower rate than previously predicted. Following growth of 1.2% last year, the IMF trimmed its forecast for 2020 from 1.4% to 1.3%, and also downgraded its forecast for Germany’s expansion this year from 1.2% to 1 1%, citing weakness in the country’s manufacturing sector.
Germany’s economy expanded by 0.6% during 2019, representing its lowest calendar-year growth rate since 2013. Growth was supported by household spending, and industrial production was dragged down by low output from the automotive sector. Although exports increased, they rose more slowly than in previous years. During November, exports fell at an annualised rate of 2.9%, and imports fell by 1.6%. The ZEW Indicator of economic sentiment suggested that optimism amongst German investors had improved to its highest level since July 2015, buoyed by thawing trade relations between the US and China.
Global Bond Market Review
Seeking safe havens
Global bond yields declined during January as investors sought safe havens against a backdrop of rising worry over the Coronavirus, alongside broader concerns over the outlook for global economic growth. The Coronavirus continued to spread over the month, and curbs on travel, alongside corporate and manufacturing shutdowns, raised speculation over the disease’s eventual economic impact.
“The ECB launched a review of its monetary policy strategy”
According to credit ratings agency Fitch, the scale of the Coronavirus outbreak would have to rise “substantially” in order to have a significant effect on sovereign credit ratings. Fitch believes that Asia Pacific sovereigns have sufficient financial buffers and enough room for further policy easing to offset any short-term impact on economic activity. However, if the outbreak becomes more prolonged, the severity of its impact could intensify, particularly on countries with significant exposure to tourism.
The US Federal Reserve (Fed) maintained its key federal funds rate at a range of 1.5% to 1.75% at January’s meeting of the Federal Open Market Committee (FOMC). Earlier in the week, President Donald Trump urged the Fed to cut rates, tweeting: “The Fed should get smart & lower the Rate … There is almost no inflation”. The yield on the benchmark US Treasury bond fell to its lowest level since September during January. The yield curve briefly inverted for the first time since October at the end of the month, triggering fresh concerns over the economic outlook. Over January as a whole, the yield on the benchmark US Treasury bond fell from 1.92% to 1.51%.
The European Central Bank (ECB) launched a review of its monetary policy strategy during the month, generating speculation that policymakers might change their longstanding inflation target of below, but close to 2%. The benchmark German government bond yield fell from -0.47% to -0.64% during January, while the yield on the benchmark French government bond declined from -0.30% to -0.47%.
Fixed income funds enjoyed net retail inflows of £1.1 billion in December, outstripped only by equities with £1.8 billion, according to the Investment Association (IA). £ Strategic Bond was the second-best-selling IA sector during December, behind UK All Companies, which enjoyed a sharp reversal of fortune following a General Election in which Boris Johnson achieved a large working majority. Funds in the Global Bonds and Global Emerging Markets Bond sectors also experienced a sharp resurgence in demand during the month.
UK Bond Market Review
Flight to safety
Gilt yields fell during January as investors sought the perceived safety of government bonds. Although the US and China signed their “Phase One” trade deal, this news – alongside the UK’s eventual departure from the EU on 31 January – was overshadowed by growing concerns over the spread and severity of the coronavirus. Over January as a whole, the yield on the benchmark UK gilt fell from 0.76% to 0.53%. Governor of the Bank of England (BoE) Mark Carney commented: “The UK is entering a decade of potentially profound structural change. New trading arrangements will be struck … Major initiatives are likely … The Monetary Policy Committee (MPC) will need to assess the implications of all these developments”.
“The UK economy posted its slowest rate of annualised growth since spring 2012”
The UK economy posted its slowest rate of annualised growth since spring 2012 during November, contracting by 0.3% month on month. Growth was undermined by a deteriorating services sector. Over three months, the economy expanded by 0.1%. The International Monetary Fund (IMF) expects the UK to post stronger economic growth than the eurozone in 2019 and 2020, although its predictions assume an orderly Brexit and a gradual transition to a new economic relationship. The UK is forecast to achieve growth of 1.4% this year and 1.5% next year, compared with the eurozone’s projected growth of 1.3% this year and 1.4% next year.
The UK’s annualised rate of inflation fell from 1.5% in November to 1.3% in December, declining to its lowest level since November 2016 and fuelling speculation over the possibility of an interest-rate cut. The BoE expects inflation to remain “notably” below its target level of 2% throughout 2020 and into 2021, dampened by lower utility bills, before rising to meet the 2% target by the end of next year.
The BoE held its key base rate at 0.75% at the MPC’s January meeting. MPC members voted by seven to two in favour of maintaining their current stance, citing “recent indicators … that global growth has stabilised”, but the central bank emphasised that it remained ready to take action if warranted.
PWC’s Global CEO Survey found that the UK was ranked fourth amongst the top countries for growth – alongside India – behind the US, China and Germany. Nevertheless, over 53% of chief executives expect the global economy to slow down in 2020 for the first time in the survey’s 23-year history.
UK Equity Market Review
The transition period begins
Brexit finally “got done” in January as the UK finally left the EU on 31 January. However, with a transition period of only 11 months, the Government is now under pressure to negotiate its new relationship with the EU, and Prime Minister Boris Johnson has stated that the Implementation Period will not be extended beyond 31 December. The British Chambers of Commerce (BCC) urged the Government to “move quickly … to ensure that Brexit is done right”, warning that clarity over the UK’s future trading relationship with the EU was “crucial” to the growth and investment prospects of many UK companies.
“2019 saw ‘exceptional’ levels of profit warnings amongst UK quoted companies”
A survey undertaken by the BCC in the final quarter of 2019 found that found that indicators for most UK industry sectors had deteriorated. The outlook for the services sector – which accounts for 80% of the UK economy – had worsened, undermined by “sluggish” household spending and “crippling cost pressures”. Meanwhile, indicators for manufacturing and export orders proved negative for two consecutive quarters for the first time since 2009 and 2011 respectively.
2019 saw “exceptional” levels of profit warnings amongst UK quoted companies, according to research undertaken by EY. Warnings rose at an annualised rate of 9% to 313 to reach their highest number since 2015. As Brexit-related uncertainty dragged on into the fourth quarter, 22% of profit warnings were attributed to political uncertainties. Retailers led the field with 32 profit warnings, followed by industrial support services and software & computer services with 25 warnings each. For a second consecutive year, one-third of listed UK retailers issued a profit warning during 2019 against a backdrop of weak consumer confidence, higher costs and heavy discounting.
The British Retail Consortium (BRC) found that the UK experienced its worst-ever year for retail sales during 2019, which was the first-ever year to post an annual decline. The BRC cited the impact of Brexit-related uncertainty, political instability, and customers’ changing habits. Fashion retailers Superdry and Joules issued profit warnings during January, while like-for-like sales at Tesco declined over the important Christmas trade period. In contrast, bakery chain Greggs reported stronger-than-expected full-year earnings. High-street chain Next reported better-than-expected sales over the crucial Christmas trading season and upgraded its annual earnings forecast. The FTSE 100 Index and the FTSE 250 Index both declined by 3.4% during January.
UK Equity Income Market Review
Brexit, trade… and the Coronavirus
In common with most major equity markets around the world, UK equity indices fell during January as concerns over the rise of Coronavirus outweighed optimism resulting from the signing of the “Phase One” trade deal between the US and China. Meanwhile, after years of heated political debate, the UK finally quit the EU: Brexit took place at 11pm on 31 January, triggering the start of an 11-month transition period.
“After years of heated political debate, the UK finally quit the EU”
The FTSE 100 Index and the FTSE 250 Index both fell by 3.4% during January. Having announced a 36% decline in profits, Royal Dutch Shell reduced the pace of its share buyback programme in order to concentrate on cutting its debts. During January, the best-performing FTSE industry sectors included leisure goods, household goods & home construction, utilities, and aerospace & defence. At the other end of the performance spectrum, the worst-performing FTSE sectors included fixed-line telecommunications, forestry & paper, and industrial metals & mining.
During January, the yield on the FTSE 100 Index rose from 4.36% to 4.51%, while the FTSE 250 Index’s yield increased from 2.95% to 3.12%. In comparison, the yield on the benchmark UK gilt fell from 0.76% to 0.53%.
UK companies paid a record £110.5 billion-worth of dividends during 2019, representing a 10.7% increase on 2018, according to Link Asset Services’ Dividend Monitor. However, £12 billion of 2019’s total was attributable to special dividends, and underlying dividend growth was only 2.8% – the slowest increase since 2014. Looking ahead, dividend payments in 2020 are forecast to reach £102.7 billion – a headline drop of 7.1% and an underlying drop of 0.7% – dampened by a stronger pound and slower dividend growth from big payers in the mining and banking sectors.
Demand for UK equity funds staged a sharp recovery during December, following the Conservative Party’s decisive victory in the General Election. Against a backdrop of greater political certainty – particularly with regard to Brexit – demand for UK equities rose sharply and, according to the Investment Association (IA), the mainstream UK All Companies sector proved to be the most popular IA sector for the first month since March 2017, achieving its highest net retail sales since June 2013. The UK Smaller Companies and UK Equity Income sectors also experienced a sharp jump in demand, and UK Equity Income enjoyed its strongest month since May 2019.
US Market Review
US and China sign their “Phase One” deal
2020 began with fresh geopolitical tensions amid signs of rising hostility between the US and Iran. Nevertheless, by mid-month these pressures had eased and the signing of the “Phase One” trade agreement between the US and China provided a boost for investment sentiment, driving US share prices to new highs.
“They’ve taken advantage for a long time” (President Trump on Europe)
Investors’ buoyant sentiment proved relatively short-lived, however, as fears over the spread and impact of the coronavirus began to take hold. Chairman of the US Federal Reserve (Fed) Jerome Powell said that he expects the virus to hamper China’s economic growth, but it is still too soon to determine the impact on the US. The Dow Jones Industrial Average Index fell by 1% over January, while the S&P 500 Index declined by 0.2%. The Nasdaq Index bucked the trend, rising by 2% following a strong performance from information technology stocks.
According to credit ratings agency Fitch, while the signing of the interim trade agreement will provide a boost for business confidence and the stability of global growth, its full impact will depend on the implementation of the deal. Fitch believes the deal “pauses but does not end the US-China trade war”. Progression to a “Phase Two” deal will depend on the successful implementation of Phase One, and Fitch warned that Phase Two negotiations will include “contentious” issues, including structural economic reform in China, suggesting that significant uncertainties remain. The US also withdrew its previous decision to accuse China of currency manipulation during the month: as part of the “Phase One” trade deal, China agreed to refrain from competitive devaluation.
At the World Economic Forum (WEF) in Davos, President Trump subsequently turned his attention from trade with China to trade with Europe, stressing that he wanted a trade deal and commenting: “They’ve taken advantage for a long time”.
The US economy expanded by 2.3% during 2019, posting its slowest annual growth since 2016 as the impact of tax cuts faded. The economy expanded at an annualised rate of 2.1% during the fourth quarter, unchanged from the third quarter. Disposable personal income rose by 1.5% in the fourth quarter, compared with 2.9% in the third quarter. The International Monetary Fund (IMF) expects growth in the US to moderate from 2.3% in 2019 to 2% in 2020, easing further to 1.7% next year.