- 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.
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%.
Overall, the fourth quarter was a positive period for equity investors, with most developed and emerging markets making gains. Once again, all eyes were on the US-China trade dispute, which made significant progress in December when the two countries announced 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.
Even though there has been some improvement in the US economy and promising signs in the European manufacturing sector, several truths remain.
First, the current economic and market cycle is around 10 years old and this means the next downturn is inching closer with each passing day. Second, while global growth is expected to moderate over the coming year, it is still somewhat sluggish in nature. And third, question marks still hang over the health of China’s economy and the fact that it continues to slow down, which in turn means less demand for goods and commodities.
As always, we position our portfolios to reflect where we are in the current economic and market cycle. Throughout much of the fourth quarter of 2019, equity markets performed well and bond markets struggled. This was a reflection of greater optimism among investors and an improved outlook for the global economy for the year ahead.
Our current portfolio positioning has changed very little since the previous quarter in part because the change in expectations across asset classes has been fairly uniform in nature. This means that it makes little sense to make large movements out of one asset class into another because doing so will not necessarily yield much in the way of results.
Where changes have taken place, they have been small. For example, we made a small reduction to emerging market equities across our portfolios, same too for US equities. We also trimmed global bonds and UK government bonds on the expectation of lower returns in the coming months.
As always, all our portfolios carry a degree of risk and as such their unit price will move both up and down in different measures depending on their risk rating. We have already factored into our recommendations that the value of your investments will fall as well as rise at different times.
However, if you feel at all uncomfortable with the volatility of any investment, we are advising you on, please contact your adviser who can discuss this with you and, if necessary, carry out a reassessment of your ability to bear losses and appetite for investment risk.