In January, global equity markets rose tentatively. However, the first 20 days of the year were relatively promising, with growth of 2,5%. Nevertheless, concerns about the spread of coronavirus from China put a damper on this positive trend at the end of the month.
The optimism seen in early January was due to the spectacular rise in the markets recorded at the end of 2019. Everything began with the promise between the United States and China of a first phase trade deal, which was signed on 15 January in Washington. Then the outcome of Brexit became clear as the UK formally left the European Union on 31 January 2020.
Confidence indicators beat market expectations across the board, especially in the manufacturing sector. In December, we anticipated a possible recovery in industrial activity in 2020 in the event political tensions eased—a recovery which began to appear via the gradual increase in PMIs (Purchasing Managers’ Indexes).
Finally, in terms of growth, figures were in line with expectations. In Q4 2019, the first year-on-year quarterly growth estimate in the United States was 2,1%, while the markets were expecting 2%. This quarter, consumption has risen at a slightly slower rate while investments have again weighed on growth. The reduction in imports contributed positively to growth.
In the eurozone, economic growth remained fairly flat with annual growth of 1% in the fourth quarter.
However, certain countries’ figures were below expectations: France gained 0,8% whereas 1,2% was expected. Italy was the greatest disappointment at 0% versus an estimated 0,3%.
Finally, it should be noted that central banks continued to adopt a very accommodative stance, which was certainly welcomed by the markets. In order to take advantage of the easing of political tensions, accommodative monetary policies and positive surprises in manufacturing, we once again increased our weighting in equities, making our allocation neutral.
After an exceptional year for the stock markets in 2019, at the end of which the major indices had risen by more than 20% across all markets (+30,99% for the MSCI World, +26,82% for the MSCI Europe, +34,09% for the MSCI North America and +20,99% for the MSCI Emerging Markets), the equity markets moved little as the spread of coronavirus and geopolitical tensions in the Middle East slowed their momentum. Moreover, at the end of January, the performances of some of the major stock market indices calculated in euros were positive, while others were negative: +0,63% for the MSCI World (international equities), -1,31% for the MSCI Europe, +1,36% for the MSCI North America and -3,44% for the MSCI Emerging Markets. The fact is that the global economy slowed down. This did not keep investors from remaining optimistic, since they remain comforted by the ongoing monetary support provided by major central banks around the world. In recent weeks, the risk that coronavirus might spread around the world has revived investor concerns and triggered a few tumultuous sessions. However, the partial soothing of major geopolitical concerns (trade war, Brexit, Iran) and reassuring earnings publications underpinned the world’s leading stock markets in spite of ever-high valuation levels.
Reassured by early indicators that stabilised, we continued to gradually increase our equity allocation in January, and have started February with neutral positioning on the equities segment. With the US elections in the background, trade tensions should continue to fade, as evidenced by the signature of the phase 1 deal between China and the US, as well as the agreement reached by France and the US on the deferral of the GAFA tax and additional customs duties.
From a geographical point of view, we are maintaining our preference for the US market, which offers higher growth rates and a more favourable corporate tax policy. Given the sustained valuation levels, this positioning will also enable us to benefit from the US dollar's safe haven status in the event of a downturn in the markets.
As for our sector recommendations, we are maintaining our negative view of materials, utilities and semiconductors, which represent the most cyclical part of the IT sector. Our favourites are still the communication services, real estate and healthcare sectors.
Sovereign yields and bonds
In January, the signature of the trade deal between the Chinese and US authorities extended the end-of-year risk aversion, driving up sovereign bond yields. This increase was short-lived, however, since coronavirus emerged in China. Investors opted to preserve their capital by investing in safe havens such as US and German treasury bills.
In Italy, the markets welcomed the return to political optimism following the defeat of Matteo Salvini's Northern League in regional elections. This event caused the Italian 10-year yield to fall below 1% for the first time since November. Yield on Greek government bond yields also fell.
In the current environment, in which the development of coronavirus leaves many questions unanswered, we suggest that this asset class should not be overlooked as a means of diversifying and preserving capital.
In terms of money market investments, given the downward trend and historically low rates in Europe, investing in a money market instrument denominated in euros is not an attractive option for investors.
Last month, the credit market posted a positive performance as a result of falling risk premiums. Looking ahead, we expect spreads to move laterally within boundaries determined by a fragile economy and accommodative monetary policies.
We have been saying the same thing for several months. In Europe, the credit market environment remained favourable to investors, due to the European Central Bank (ECB)'s presence in this asset class. In our view, it is more likely for its balance sheet to grow than for key rates to continue being cut. Another point in favour of the credit market is that historically low sovereign yields have led to an increased appetite for higher risk assets. Furthermore, investors such as insurers and pension funds are subject to yield constraints and have virtually no choice if they do not want to increase the duration of their portfolios.
However, it should be noted that credit remains exposed to the risk of a contraction in the economy. Corporate balance sheets remain the weak link, and a feverish economy would affect corporate earnings and companies’ ability to pay their debts.
In the US, the technical factors referred to above are also support the credit market, but to a lesser extent than in Europe. That said, we have seen growth stabilise, boosted by the Fed's responsiveness. It should also be noted that US companies are heavily indebted. Therefore, at this stage, it is important to be selective by focusing on company fundamentals.
In conclusion, we would like to reiterate that economic and geopolitical concerns counterbalance the enduring demand for credit. As such, we prefer to remain vigilant with regard to private debt and to opt for non-cyclical companies with solid balance sheets that are eligible for the ECB’s buyback programme. This enables us to generate returns above those of sovereign bonds.
In January, the dollar rose against the euro. In fact, the price of the euro fell from USD 1,12 at the beginning of the month to USD 1,11 at the end of the month, which helped reverse the trend that prevailed in December 2019.
This was mainly due to geopolitical tensions at the beginning of the month when Iran and the US exchanged missiles and coronavirus spread through China. Market operators therefore probably elected to expose themselves to the currency they considered to be the least risky, being a safe haven.
Nevertheless, the volatility of this exchange rate remains low and we are maintaining our forecast in the range of 1,08-1,13.
There are certain factors that could lead us to change our view in the near future. Among them are the negotiations between the UK and the EU, a weakened Chinese economy influencing trade negotiations between China and the US, and increasing volatility on capital markets.
In December, the price of gold climbed to around USD 1.580 per ounce, posting gains of nearly 4%. As expected, the upward trend continued and the price reached its highest point since 2013. Among the factors contributing to this strong performance were the substantial tensions between the US and Iran at the beginning of the month and, above all, the spread of coronavirus in China, which casts some doubt over the prospects for economic growth internationally.
Against this background, risky assets suffered a sharp correction and, conversely, safe havens such as fixed income products and precious metals were extremely sought after. Moreover, the low-rate environment (which reduces the opportunity cost of holding an asset that offers no coupons or dividends) and central bank purchasing buoyed gold prices.
We are continuing to favour exposure to changes in the price of gold through shares in mining companies due to the significant operational leverage they offer. Another factor in support of our choices is the increased number of mergers and acquisitions within the sector and the numerous dividend increase announcements. We believe that the quarterly results to be published in the coming weeks will be very positive given the substantial operational leverage of these companies.
Gold prices should remain stable above USD 1.550 an ounce, with a real upside potential in the event of turbulence on the stock markets or an escalation in the spread of coronavirus.
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This document was produced by the Private Banking Unit and BCEE Asset Man-agement. The drafting of this document was completed on 10 February 2020 at 11:10 am.
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