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2019: Tales of the Unexpected

2019 Review

For adviser use only

This time last year we saw markets hit by their worst downturn for several years, leaving us not knowing what to expect in 2019. Good, bad or ugly? As things turned out, markets are ending 2019 on a reasonably positive note but it has been a very strange journey this year indeed.

Negative rates

The textbooks say it shouldn’t happen, but perhaps the unlikeliest economic theme for 2019 was negative interest rates. The theory is to get banks to lend out the money sat depreciating in value in their coffers in order to promote growth. Bloomberg estimates a quarter of the world’s economies have negative rates. But can the markets sustain a reality where investors pay borrowers to lend them money? The problem impinges on lower risk retail investors who may need more equity exposure to preserve the real value of their assets.

Undiplomatic relations

Where America leads, the world follows. It is no surprise then, that the ongoing US-China trade war has had global consequences. Billions of dollars in tariffs have been imposed upon goods crossing the Pacific, raising costs for the consumers of both countries as import prices go up.

This uncertainty has hurt the world economy and as its effects are not just confined to the two protagonists. Emerging Markets have been a significant beneficiary of China’s growth and may suffer as it slows down. Similarly Germany has an economy that is geared to world trade and its famed exporters are finding life more difficult.

With the S&P reaching a record high in December, a deal between the US and China now seems more likely, however relations between the world’s two biggest economies will continue to sway market sentiment throughout 2020, which sees Presidential elections in the USA.

The ‘B’ word

Brexit has dominated both newspaper headlines and market sentiment in the UK. The Parliamentary stalemate leading to this month’s General Election put investment on hold and slowed our economy. The future of our trading relationship with the EU remains a serious concern for the markets.

With a new, unexpectedly large Conservative majority in the House of Commons, markets can look forward now to some clarity as to where the UK will be heading. Our faith in the UK as an investment destination looks to have been confirmed.

European instability

Europe has perhaps been one of the major victims of 2019. Hit by a decline in world trade, for example demand for German cars, the Eurozone’s manufacturing activity has contracted for twelve consecutive months. The debt-load of some of its members is very high and we saw the unprecedented step from the European Commission of rejecting Italy’s budget in October.

Facing the uncertainty of ‘their’ Brexit trade talks, and on a failure to achieve the 2% inflation target, it is no wonder the European Central Bank (ECB) has cut rates once again – to minus 0.5% and resumed its bond buying programme. Everything is being done to revive growth in the Eurozone. Over 2020 we may see the downturn become a full-blown recession in many European countries, which must, of course, have consequences for us at home.

New norms

When QE began a decade ago, the world breathed a sigh of relief. The markets rallied and banks slowly regained each other’s trust. Stock markets have enjoyed a bull run for over 10 years. Will all the cheap money be able to maintain the momentum? We now have the crazy situation of negative interest rates in many countries, where a lender will pay the borrower to take the money. Perhaps the new normal is low growth and low inflation.

Where we go next will depend on how the politicians and central bankers manage the confidence levels of consumers as well as on the wisdom of the lending policies adopted in the new normal. We can see an opportunity for things to go well, which is always a good reason to invest.



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