January Market round-up
Jon Cunliffe, Charles Stanley's Chief Investment Officer, looks at the market action so far this year.
Last year’s strong equity market performance continued in the first half of January, with global equities rallying as much as 2.8% before subsequently selling off and closing the month 1% weaker. Market optimism earlier in the month on the release of Q4 US corporate earnings – generally beating lowered expectations – was swiftly replaced by fears about the rapid spread of the coronavirus and its potential effects on the global economy. At the minimum, the negative impact on the Chinese economy will be considerable, with Q1 growth as soft as 1% annualised, reflecting widespread factory shutdowns and weakness in consumption. More broadly, the longer the coronavirus is not contained, the greater the risk that weak Asian growth affects the global economy via its adverse effects on supply chains and trade flows.
With a healthy labour market continuing to support the consumer, central banks still in easing mode and some targeted fiscal stimulus likely in the months ahead, we retain our baseline view that the global economy will not enter a recession over the next 12-18 months. However, the market’s earlier expectation of a swift return to above-trend global growth and double-digit increases in corporate earnings looks a little wishful at present and we would continue to characterise the global economy as in “muddle-through” mode, echoing the 2014-16 period.
Economic data released over the last few weeks had, ironically, been a little better than in the lead up to Christmas, with the much-followed Citigroup Global Economic Surprise Index reaching its highest level since the first quarter of 2018. This primarily reflected lowered near-term market expectations, but there was evidence of a nascent pickup in Chinese activity reflecting an improvement in the tech cycle. However, this has been stopped in its tracks and we, like the market, are watching carefully to see the nature and scope of further stimulus measures the Chinese authorities will deliver.
We have already seen a considerable amount of liquidity injected into the Chinese money markets (which at the time of writing has supported the equity market), but for the Chinese authorities to get anywhere near their 6% growth target this year, considerably more monetary and fiscal easing will be required. There are likely to be two potential issues with this. The first relates to its impact on the yuan. Further currency weakness from here is likely to be unwelcome from a US perspective. The second relates to financial stability. In 2015, China had been guilty of overstimulating its economy via a RMB7trn infrastructure spending plan augmented by monetary policy easing. In the short term this boosted economic and financial market sentiment, but caused an unsustainable and speculative ramp up in the equity market which subsequently corrected quite savagely. Whilst seeking to boost growth in the months ahead, the Chinese may have to settle for a lower flight path for growth in 2020 than the current 6% target.
What does this mean for investors? We are not currently bearish, but higher equity valuations and sluggish growth and earnings delivery supports trimming back overweight equity positions, in expectation of higher volatility and lower risk asset returns this year. With typical balanced portfolios returning in the region of 17% last year, we would expect returns this year to be in the mid-single digits, with modest returns from bonds on low central bank policy rates which, in turn, are likely to continue to support the relatively-high equity valuations with which we started 2020.
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Jon Cunliffe is Chief Investment Officer at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.