Market update – December 2019
A summary of our current economic and market views.
03 Dec 2019
Stocks edge higher amid trade talk optimism
Global equity markets continue to rise as confidence in a US-China trade deal grows. US stocks lead the way, pushing further into record territory, while other major markets are at or slightly below peaks.
With investors in a more optimistic mood, bonds have surrendered some of the year’s gains, but remain in strong demand. Progress in trade talks has been accompanied by signs of improving global growth. In the US, capital goods spending increased at the fastest pace since January. And in Europe, German manufacturing is showing early signs of recovery. These indicators support our view that the global economy is stabilising as we head into 2020.
Central banks remain supportive
Though the Fed has indicated it will leave rates on hold for now, the minutes of its latest meeting and a recent speech by Chairman Jay Powell suggest it is not moving away from its accommodative stance. This is a key factor behind continued bond market strength.
In the UK, markets were surprised when two members of the Bank of England’s Monetary Policy Committee voted for an interest rate cut in November. This suggests the UK central bank may be more inclined than previously thought to cut rates, especially if the upcoming election results in continued political uncertainty.
Conservatives pulling ahead in UK polls
The latest UK polling data suggests the Conservatives have extended their lead over the opposition Labour party. This has supported domestically-exposed UK stocks, as many investors believe a Conservative victory will result in greater clarity over the course of Brexit. UK stocks have also been supported by high levels of M&A, as we explore here. However, current UK activity is weak, with November survey data suggesting that both the services and manufacturing sectors are struggling.
We have not made significant adjustments to our portfolio over the past month. Our equity exposure has continued to perform well. Our weighting remains in line with our long-term target allocations. Though bonds have retreated slightly from their recent highs, we still consider them expensive and maintain an underweight position. By contrast, we continue to like alternatives as a means of increasing diversification within portfolios. We also continue to hold a slightly overweight position in cash, which allows us to quickly take advantage of any opportunities that may arise.