John Moore: Markets in 2020 - More of the same ahead?



John Moore, senior investment manager at Brewin Dolphin, highlights the company’s predictions for the year ahead.

John Moore, senior investment manager at Brewin Dolphin

After a choppy 12 months for markets, investors will be hoping 2020 will be the year for resolutions – not necessarily in terms of promises kept, but conclusions to a variety of long-running developments in world affairs.

Between the US-China trade war, a variety of events in domestic politics, and geo-political reverberations in the Middle East and further afield, there has been a lot to contend with. It was perhaps for good reason that markets saw a return to volatility in 2019.

Many of these issues will carry over into next year: talks between the world’s two largest economies continue and Brexit should happen on January 31st, at the earliest. There are some new factors to throw into the pile too, not least an election in the USA.

Here’s what the next 12 months could have in store:

US election: boom or bust for big tech? – The one scenario that will almost certainly be resolved in 2020 is the US election. Concerns over its potential outcomes are already being priced in to shares, particularly in sectors that have already become political footballs. Elizabeth Warren, for example, has made no secret of her feelings about Facebook and a desire to break up some of the other tech giants. Other candidates have targeted healthcare. It’s noticeable that many of the big tech companies – like Amazon and Google-owner Alphabet – have failed to hit new highs with their share prices this cycle. In 2018, tech companies were vying with each other to break new records, before the sell-off in October. Indeed, enthusiasm for Facebook has dampened since the summer, which coincided with Elizabeth Warren’s rise to prominence as a potential Democrat candidate. On the other side of the political divide, if Trump looks likely to win, the technology, pharmaceuticals and biotech firms – which account for around one-third of the market – could push higher. This is a theme that is likely develop in the first quarter of the year, rather than waiting till closer to the election in November.

UK market to remain plugged into politics – The FTSE 100 and other UK indices are now so firmly plugged into political lines that any movement in the pound tends to see a correlated shift in share prices. Multi-national companies with a high percentage of earnings abroad have tended to see price rises when sterling has weakened, while domestically focussed earners have been under pressure. It’s been a well-worn path since the Brexit vote and it could continue into 2020. If the UK’s exit from the EU can be agreed in a manner that the market abides – whether that is on January 31st or later – the FTSE and other indices should benefit. If it goes the other way, the reverse may apply.

Suck it and see for interest rates – There isn’t a huge amount of clarity on where interest rates might go in 2020; but, as with most things, they will be beholden to politics. In the UK, if the economy bounces on the back of some benign Brexit news, then rates will likely edge up next year. If it goes the other way, the base rate may follow. In the US it will be another case of suck it and see in response to the political framework, while European rates will depend on where the consensus lies and individual state spending plans. In all major economies, it feels like rates will be more politically driven, which is perhaps the wrong way around. That, however, appears to be where we are now.

FTSE could hit a new high – The ingredients are there for the FTSE 100 to hit a new high. In comparative terms, UK companies look undervalued and the reasons for not owning UK assets are starting to dissipate. That could precipitate a return to UK equities for investors who previously sold them off. While there has been some volatility and a couple of new index highs, the FTSE 100 is more or less where it was two years ago. Meanwhile, the S+P 500 sits in record territory and it is a similar story for other markets. It may not be immediate, but with greater political certainty there are good reasons to believe the main UK market can hit a new high in 2020. Whether it will hit 8,000 points, as some have suggested, is another question. That could begin to look like an adrenaline rush, rather than the steady uplift the market would want.

Bonds will be a political call – The UK’s ultra-long bonds are offering very low yields at high prices: a gilt that matures in 2071 is locked in at a coupon of 1.21%. Those numbers are almost preposterous – at no point in financial history would that stack up. It’s been precipitated by a situation where clearing banks, pension funds, and the like have tried to lock away stock market and political risk as much as possible. It’s not unreasonable to think that returns on bonds are too low and we could be in line for a rise (with negative impacts on prices). For investors in UK bonds, it’s a call on Brexit: there’s a political risk premium built into current prices and, if you’re relatively sanguine about its effect in the medium term, then 2020 could be a good year to look elsewhere for returns and relative safety.

China the key to commodities – China’s economic performance hasn’t been great over the past 12 months. Between trade wars and the re-balancing of economic policy, China hasn’t delivered the expected level of demand – other emerging markets have been similar, in that respect. There are a couple of factors at play here: the first is where we sit in relation to China’s five-year plan and the second is the US election. Decision-making in China will be influenced by both of these factors and how accommodative the government needs to be. The other area of interest will be how the situation in Hong Kong evolves in the months ahead. As ever, there’s a certain amount of guesswork when it comes to China, but in the first half of next year we should see some clarity over its direction, while the second half could see implementation. Both will have consequences for assets prices. If, for example, the US and China can come to a mutually beneficial agreement in trade talks, it could lead to a spike in the oil price and other commodities.

A crunch year for property – Suspension of trading in the M&G Property Portfolio fund in December brought the risks of investing in commercial property back to the fore. With many of these funds, investors are offered the ability to deal on a daily basis – yet, property is an illiquid asset that takes time to sell. It is a fundamental mismatch that will most likely require reform. While there have been select opportunities, in the main the last 12 months or so have been particularly tough for property funds and, away from this, companies with a large exposure to retail assets – none more so than Intu, owner of the Trafford Centre in Manchester and Braehead in Glasgow. The business has seen its share price fall around two-thirds in 2019, as it has struggled to turn the tide under a significant pile of debt. If Intu starts to hit more trouble, it could be a sign of even tougher times ahead for others in the sector.



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