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Market Commentary

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November was a good month for equity investors with the American market making a strong run and closing not far off its high for the entire year. The UK market has followed a similar pattern, although the FTSE All Share is some way behind the USA in terms of 2019 performance.

November

New highs for US shares

In late November the S&P500 index rose above the 3000 level and set a new all time high of 3153. In sterling terms it has returned more than 25% in 2019. There have been hints that the US and China may be close to finalising “phase one” of a trade deal. If a deal is not secured by December 15th additional tariffs on Chinese exports will be implemented. It remains to be seen if the two countries can agree on issues such as intellectual property and Trump’s recent support of pro-democracy demonstrators in Hong Kong may hinder talks. On the other hand, some sort of deal would help Trump as some positive news might deflect attention from the impeachment proceedings he may be facing.

Above all the American economy is in reasonable shape despite these tariff concerns and slowing global trade. Manufacturing figures hinted activity picked up in November. Federal Reserve Chairman Jay Powell stated that interest rates are unlikely to be lowered soon, suggesting that the US central bank is happy with the health of the economy, which grew by an annualised 2.1% in the third quarter, and see no reason to cut further.

On the side-lines watch out for Democratic politicians and the race for their party’s nomination. Although it is just under a year to the Presidential election, the candidate chosen to oppose Trump may affect market sentiment. Frontrunner Elizabeth Warren is perceived to be negative for stock markets with her talk of a wealth tax and plans for raising US capital gains tax.

UK politics: uncertain outcomes

For the UK it has all been about the election on December 12th. However as 80% of the value the FTSE 100 index is international rather than domestic, trade talks have influenced sentiment in November. However, in December politics will play a key role depending upon the election result. There is clear water between the major parties, from a distinctly unadventurous Conservative manifesto, a much more radical one from Labour, and a Remain stance from the Liberals. The outcome may have long term impact of the shape of the UK economy. Proposed nationalisation of key industries (water, energy and rail) should Labour gain a majority, and increased spending plans from both major parties will raise borrowing as a percentage of GDP. Whatever the result, expect the currency and fixed interest markets to react first, followed by the stock market as the result is digested.

If the Conservatives win well there is a high probability of a relief rally. If Johnson manages to conclude Brexit as a result, business may regain the confidence to invest. Also given that the UK stock market is attractively valued relatively speaking, international investors may be tempted to buy the market because there will be more certainty in this scenario. A lot of “ifs” perhaps but watch this space.

Sluggish Europe. Will Germany ride to the rescue?

And finally, Europe which is waiting on governments to take over the heavy lifting in trying to reinvigorate the region’s economy. The former IMF head Christine Lagarde is now in charge of the ECB. As a parting gift the previous incumbent Mario Dragi initiated more quantitative easing (QE) in September. However, in his farewell speech Dragi called on European governments to loosen their spending plans to stimulate the economy, in effect announcing that the limit to QE had been reached in Europe.

The Eurozone’s economy remains sluggish with growth just over 1% while Germany has a budget surplus. Germany, being a trading nation, is suffering as world trade contracts, but would benefit from a significant increase in government spending to upgrade its creaking infrastructure. Whether the headwinds prompt a change of heart from this fiscally prudent nation, which could ignite activity in its neighbours, remains to be seen.



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