New article from Tatton Investment Management: Brightening horizons - 2020 Outlook

16 December 2019

Tatton Weekly recipients will have already seen our comment on the election outcome this morning and so we will not rerun those comments here – please refer to the email from Tatton Investment Management which you should have received just before noon.

After a wobbly start to the last month of the year, sentiment has improved over the last week and not just on the decisive UK election outcome. Boris Johnson has the necessary majority to end the prolonged period of Brexit uncertainty that has held back business activity and much needed business investment. However, this still means that the UK will create some distance between it and its nearest and largest trading partners. We can expect an initial economic activity bounce, spurred by pent up business investment, but the longer-term perspective on post-Brexit Britain will depend on its future relationship with the EU.

As we wrote last week, a stable majority government with the urgency for progress that Johnson’s administration displayed during its first 100 days, bodes well for a more pragmatic approach to Brexit. This will offer the opportunity to overcome the divisions in the UK society that have taken hold of the country since the Brexit referendum and the closer the UK remains to the EU’s economic area the less likely should be a break-up of the Union.

The reason however that stock markets around the world surged upwards on Friday had more to do with US president Trump announcing (via his notorious Twitter account) that the first phase of a trade deal with China had been agreed ‘in principle’. After some confusion as to what this might entail, markets were reassured by a confirmation on Friday afternoon from the Chinese side that a phase one deal had indeed progressed to signing stage.

Recent economic data shows that the global economy is no longer slowing, and businesses – across Europe in particular – are looking more optimistically into the future. This has led to a more positive outlook to 2020 than seemed possible just a few months ago.

The global economy is not out of the woods yet, but stock markets have already priced in corporate profit growth between 5 and 10% for the coming year. This makes the starting point for 2020 slightly uncomfortable. However, the general outlook has become far less fractured than it had been over the past two years.

In 2018, the economy and corporate results were on the up, but stock markets threw another tantrum over inflation and bond market fears. In 2019, the economy and corporate results plunged back to stall speed as the manufacturing sector experienced another mid-cycle slowdown. Yet, stock markets only seemed to care about whether central bank intervention had put the fear ‘genie’ of a bond market collapse ‘back in the bottle’, rallying back to their previous valuation levels and providing investors with handsome returns in compensation for the 2018 year-end upset.

So, a reasonable prediction is that, after this roller coaster ride between economic fundamentals and market action, 2020 may see us entering calmer waters. We would generally agree, but for the time being, even with more certainty on the trade front, we are not yet looking at a barnstormer year ahead.  In our 2020 outlook, we suggest that there is every reason to be cautiously optimistic. However, a more bullish outlook would need some significant additional catalyst for growth: perhaps a concerted global initiative towards CO2 emission-reducing technologies, or some form of follow-on from the last two decades of the spoils from ‘the internet of things’

 

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