Market update – February 2020

Stock markets resilient despite eventful start to 2020

When asked what he most feared, Harold McMillan famously replied “events, dear boy, events.” January has seen a confluence of events: sabre-rattling in the Middle East; further wildfires in Australia and the outbreak of an epidemic in China. The latter in particular has caused anxiety in equity markets. Investors are assuming that the economic impact of the coronavirus will be short-lived, with growth quickly rebounding once it is contained – an assumption that is supported by the history of the SARS epidemic in 2003. The coronavirus, and concern about its impact on global growth, has led to fresh demand for the safety of government bonds, with yields grinding ever lower.

Central banks remain on standby

Despite hints that it was leaning towards a rate cut, a clear majority of the Bank of England’s Monetary Policy Committee voted to leave UK interest rates on hold at 0.75%. In its statement, the BoE dropped its guidance towards gradual tightening of monetary policy and reiterated that it remains ready to act if UK growth fails to pick up. The Federal Reserve also remains supportive. At its latest meeting, the US central bank again observed that core inflation is still well below its 2% target. Markets have responded by pricing in a higher probability of additional US interest rate cuts over the next 12 months.

UK political developments return to the fore

The UK has now formally left the EU and entered into a transition period. Political developments will remain crucial for UK markets over the coming months. Negotiations will soon begin with the EU over trade and other matters. Next month will see the first budget from Boris Johnson’s new government. The Conservative party has given clear indications that it is no longer the party of austerity and does not plan to run a balanced budget. It remains to be seen what impact this will have on the UK’s growth and debt profile – and how markets will respond.

Portfolio positioning

We maintain a neutral allocation to equities across portfolios. While the coronavirus could have a real impact on Chinese growth in the short term, the authorities are taking the threat seriously and have responded decisively. Although market weakness may provide interesting buying opportunities, we need to see evidence of a peak in new coronavirus cases and more conclusive information on the mortality rate before adding significantly.  Assuming the virus is contained relatively soon, we expect growth to rebound, supported by a healthier outlook for global trade following the deal concluded between the US and China.  We remain underweight bonds, though some areas of the market – such as emerging markets – look relatively more appealing. We continue to favour diversifiers, including gold which has continued to perform strongly in 2020.

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