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End of Year 2019

It has been a strong year for equity markets. At the time of writing, the MSCI World Index is up 22%. Arguably the two largest overhangs that have faced investors this year: the Sino-US trade deal and the UK political deadlock, have finally offered some clarity.

It is around this point in the year when the commentarial release their forecasts for the year to come. We will examine some of the themes that have run through 2019 and what we think will shape portfolio returns in 2020. 

 

Beyond BoJo’s Brexit

UK markets and sterling in 2019 have been affected by unprecedented levels of uncertainty. The prospect of the UK crashing out of the EU has seemed very real at points throughout the year and Jeremy Corbyn has been waiting in the wings suggesting a substantial overhaul of the capitalist culture that we currently operate within; a four-day week and nationalisation of public services amongst some policies.

On Friday 13th December (you couldn’t write it) we heard the British public’s wish; an emphatic victory for the Conservative Party. Regardless of political preferences, there is no doubt that a working majority of eighty-eight will help clear the path for a version of Boris Johnson’s Withdrawal Agreement Bill to succeed.

At the very least a second referendum – or “People’s Vote” is almost certainly off the cards, and the chance of a no-deal is significantly lower.

Twelve months ago, we spoke of Brexit. We will be speaking of it for years to come. The divorce from the European Union is likely to hang over the UK economy for some time. It looks likely that the UK will be able to leave the EU on January 31st 2020. Brexit negotiations will then move onto deciding the future relationship between the EU and UK after the transition period. Given the complicated and long relationship between the UK and EU, this spans everything from trade to defence and data protection. It is difficult to overstate what a mammoth task this is. 

Until next year’s review then… 

Tug of Trade-War

To the 10th December, since his inauguration, President Trump has tweeted 344 times about China, with 78 tweets mentioning both China and trade. It is therefore not surprising that trade negotiations have had highs and lows and both sides have been at loggerheads Tariffs have undoubtedly weakened the rate of global growth, prompting the Federal Reserve to about turn on their rate-rising agenda. The US central bank has cut rates three times this year.

The President seems to use the markets as a barometer for success and as Donald Trump looks to 2020 and a reelection campaign, he needs the US firing on all cylinders. It is not surprising that a Phase One trade deal has just been announced. The next round of 15% tariffs on US$160 billion of Chinese products, originally scheduled to take effect on December 15th, has been cancelled. For existing tariffs, the 15% levy on US$120 billion worth of Chinese goods will be cut to 7.5%. Some material progress at last.  

As the campaign trail begins and Trump looks to overcome a Democratic nomination candidate yet unknown, expect an increase on the average 12 Presidential tweets a day we have seen so far.

Interest Rates Upside Down

In August, around US$17 trillion was invested in bonds around the world yielding a negative real return – an unprecedented level. Paying someone to borrow money from you is not intuitive. Negative interest rate policy has been prevalent in Japan and more recently Europe for some time. It makes many investors feel uncomfortable. The very concept is unexplored and is a byproduct of quantitative easing (QE), the consequences of which are still too hard to assess and quantify.  

This year has seen the arrival of a new President of the European Central Bank (ECB) and of the European Commission. Christine Lagarde and Ursula von der Leyen both have a daunting task ahead of them. 

 

They – and investors – have interest rates, the environment and economic stability at the forefront of their minds. The most recent financial stability report from the ECB illuminated the effect of negative interest rates on investors, whom it says have taken on more risk, and businesses that have taken on more debt. This is something we will monitor as 2020 takes shape.

Investing in the Future

Environmental, Social and Governance (ESG) factors are driving the way the world views companies and their business models. Greater consumer scrutiny is an incredibly powerful force and financial markets are well positioned to inspire change. 

The primary concern for many who want to embrace ESG investing is the ‘E’ in the acronym. Social and Governance factors have been at the heart of our investment process since we started, and we have written extensively about the need to invest in companies with sustainable business models – it is part of our philosophy and always will be. 

We believe we can have a more beneficial impact through engagement and ownership of companies and funds that are driving positive change. 

“expect an increase on the average 12 Presidential tweets a day” 

Of course, we must be aware of those who are embellishing their ESG credentials and there are increasing accusations of “greenwashing”, or the act of appearing environmentally friendly to raise one’s public image. With so many differing angles of adoption, the issue has become complex leading to significant bifurcation in approaches to ESG investing. It is now not enough just to avoid the traditional sin sectors. 

Our approach is one of simplicity and is laid out succinctly in our Embracing Sustainability article. 

 

Who knows what progress will have been made on climate change by this time next year? What can be said, is that it will take global cooperation to bring about change and financial markets are front and centre of the activity.

Wrapping Up

There are signs of positive prospects for the year ahead and the main protagonists of recent years show signs of abating. The bull market goes on for another year and although the recovery has been a long one, it has also been shallow. Suffice to say at this stage we feel cautiously optimistic about next year. As ever, we remain alert to the risks – and, of course, the opportunities.

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