Global Market Perspective - Q1 2020

All the major asset classes ended 2019 on a positive note; equities rallied particularly strongly, especially growth stocks. Part of the reason last year was so robust was the rebound from the awful fourth quarter of 2018. Despite the deterioration in global trade and growth expectations, investors started 2019 relatively optimistic about an US-China trade deal. By spring, it became apparent that both sides were still far apart, and markets with relatively high exposure to global trade such as Japanese and emerging markets equities were the laggards for the rest of the year. Meanwhile, the easing of monetary policy by central banks not only led to a re-rating in risk assets but also spurred gains in government bonds. As the year drew to a close, equities received a further boost from the agreement of the “Phase One” deal and the dollar weakened.

While the US-China trade talks took central stage in 2019, there were plenty of other political events keeping investors vigilant over the year. In the US, shortly after the Democrats took over the House of Representatives in the 2018 mid-term elections, President Trump became only the third president to be impeached. Across the Atlantic, an extension to Brexit was granted but Theresa May was replaced as Prime Minister by Boris Johnson. The winter general election in the UK resulted in a landslide victory for the Conservative party, which means Johnson can now deliver Brexit by the end of January. In comparison, it has been a relatively quiet year for the eurozone although political risk returned to Italy and two elections in Spain could see far left Unidas Podemos in government (see 2019 Review on page 13 of the document below).

As we head into 2020, the profits outlook remains difficult given margin pressures. Moreover, equity markets already appear to be pricing in an economic rebound. In the absence of a significant liquidity impulse and further re-rating, returns are likely to be more modest compared to 2019 (see strategy note on page 24). An additional concern for investors is the rise in leverage in the corporate sector in the US and we take a closer look at the health of the corporate sector through the lens of credit markets (see research note on page 28).

In terms of asset allocation, we are positive on equities and credit. We have also increased our exposure to more cyclical markets such as Japan and the eurozone. This is in recognition of the significant loosening of monetary policy which has helped to underpin market valuations and led to some cyclical stabilisation. Sovereign bonds continue to offer little value relative to equities. Against this backdrop, we have downgraded government bonds to neutral and remain positive on gold as a hedge in the portfolio against a weaker growth outcome as flagged by our economic risk scenarios.

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