2020 January Economic Review

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  • It was a strong quarter for global stock markets, with the US seeing its best yearly gain since 2013
  • The key drivers behind stock market performance were lower interest rates and positive trade talks between the US and China
  • Bond markets struggled as investors moved out of safer-haven assets and into riskier equities
  • Overall, the global economy continues to be relatively subdued, although there has been an improvement in the US and the early signs of a turnaround in Europe.

When 2019 came to a close, investors had much to celebrate. Not only did stock markets around the world deliver strong returns over the year, but political uncertainty subsided as a result of several positive developments.

Economic update

During the final three months of 2019, there were two dominant issues in the UK: Brexit and a general election. In many ways, the two were inexorably linked. Given the political deadlock in the House of Commons, the Conservative government felt it had little choice in calling a December election, which it ultimately won in convincing fashion.

The election result set the UK on the path to leaving the European Union on 31 January 2020, and thus providing investors and businesses with the certainty they were craving for the year ahead.

Away from politics, there continued to be concerns about the health of the economy. Manufacturing output fell at its fastest rate since 2012, consumer price inflation (CPI) dipped to a three-year low of 1.3% in December, and the Bank of England downgraded its expectations for gross domestic product (GDP) growth – the main measure of economic activity – for the fourth quarter to just 0.1%.

Meanwhile, the US economy benefited from stronger than expected gross domestic product growth and employment data. This offset some weakness in the industrial sector, much of it caused by Boeing’s ongoing crisis, which has caused it to cut production due to safety concerns with its 737 MAX aircraft.

In Europe, there were signs that the economic situation may be improving following a period of falling industrial activity. While purchasing managers’ indices (PMIs), which gauge levels of industrial activity, showed the manufacturing sector remained in a state of contraction, the rate was slower than earlier in the year. However, inflation in the eurozone continued to be muted, at around 1%, and economic growth remained sluggish. According to estimates from the International Monetary Fund, eurozone GDP will likely come in at 1.2% for 2019 and then improve slightly to 1.4% in 2020.

Turning to Asia Pacific and the emerging markets, all eyes were once again focused on China. The world’s second-largest economy continued to slow down, with GDP growth for 2019 coming in at 6%, the slowest rate since 1990.

Unsurprisingly, Japan had a difficult time. Industrial output continued to slip, while GDP growth in the third quarter was strong at, 1.8%. However, it is believed October’s consumption tax increase will hit consumer spending and negatively impact growth. Because of this, the Japanese government estimates economic growth for the current fiscal year will come in at 0.9%.

Market commentary

Overall, the fourth quarter was a positive period for equity investors, with most developed and emerging markets making gains. One again, all eyes were on the US-China trade dispute, which made significant progress in December when the two countries announces a phase one trade deal.

This development was a major contributor to positive stock market performance in the US, Europe and Asia Pacific. The S&P 500 Index hit another all-time-high during the quarter, with corporate earnings and interest rate cuts also being contributors. Meanwhile, the election result was positive for UK equities, causing domestically focused companies in particular to perform well.

Conversely, fixed income markets had a challenging time. For the most part, investors were more keen to take risk over the quarter and this meant bond prices fell as money flowed into equity markets and away from the relative safety of fixed income. Yields on benchmark governments bonds in the US, UK, Germany and Japan all went up over the quarter as a result. Bond yields move in the opposite direction as bond prices.

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