Quarterly Review

A long-awaited degree of certainty

David Wheildon / January 2020

In many ways we’ve been in limbo for the last few years, implies David Wheildon – but politically there maybe a few decisions made now that point a way forward for the immediate future of the markets. Such comparative certainty, or at least likelihood, helps the global mood feel a little more pointed towards steady growth again.

The deadlock has been broken! With the resounding victory for the Conservative Party in the General Election we now have a Government in power with a clear and substantial majority that is able to move its policies through Parliament. The first item on the agenda is the UK departure from the EU which, by the time you read this, should have taken place. Clocks on Government buildings aside, this is happening with a far lower degree of fanfare than might at first have been anticipated.

Our formal departure from the EU marks the beginning of the detailed negotiations and is most definitely not the end of the Brexit saga. Over the coming months news of the negotiations will filter out with the resulting swings in sentiment and their effects on both stock markets and the strength of Sterling. When these swings occur it will be important not to over-react but to accept the medium term view that there will be a settled and negotiated outcome now that we have political stability, for the next few years at least.

The Election result was anticipated but the size of the Conservative majority certainly was not; although heavily Brexit influenced, voters were also made economic promises in an effort to engender support. These factors have persuaded traditional Labour voters to change sides as well as supporting dyed in the wool Conservatives. It remains to be seen for how long this caravan of love lasts as the UK returns to a more “normal” political landscape while the EU trade negotiations continue somewhat out of the spotlight.

 

 

Cautious optimism.

 

With Brexit resolved, an obstacle to forward momentum in the UK and Europe has been removed which, together with a (small) increase in global optimism and the beginnings of a resolution in the China/USA trade war suggests 2020 should be a year for decent returns. In America interest rates have been falling and the economy is in good shape which bodes well for the global economy as a whole. President Trump should be re-elected if the American economy is in good shape and he is doing everything in his power to ensure that it is. If he is not re-elected in November the market position then will depend a great deal on who the Democrats put up as their candidate. Markets will not respond well to a strongly “left wing” President so we will be watching events on the American political front with great interest. With further trade talks with China expected to see reductions in tariffs and in some cases their complete removal there appears to be grounds for potential growth across the board.

Taking this into consideration we see the prospects for global earnings growth as being pretty good which together with fairly lacklustre inflation figures should feed through to higher share prices in due course. There is even talk of UK interest rates being cut which, although primarily symbolic bearing in mind their current level, would be of benefit to business. There are, of course, still going to be troubles ahead as the detail of Brexit is worked on, and the Bank of England could well be readying a cut in rates to improve confidence should it be needed.

 

Prudent diversification.

 

With solid global fundamentals, a stable political position in the UK and the likelihood of the current regime continuing in America we could be accused of believing there is no danger to investment returns in 2020. This of course is naïve as we have the ongoing geopolitical risks from all parts of the world not just coming out of the Middle East.

The recent military action by America which came somewhat out of the blue reminds us that there is always a high degree of volatility around the corner and we must counter our optimism with some more stable and secure holdings as always. I am always preaching the benefits of diversification and 2020 will be a year when this is particularly important, we will not allow the fund managers’ optimism to run away with itself and jeopardise longer term returns as they chase some exciting returns.

This article is the opinion of David Wheildon,
Director of The Legal Brokerage.

This article is the opinion of David Wheildon