January 2020 Market Update
As we kickstart the new year, major geopolitical risks that have kept financial markets on edge since mid-2018 seemed to have cooled and risk–on investor sentiment have propelled markets to new records in 2019.1 This has been pretty much in–line with our earlier expectation back in November that a Santa Claus rally could be pushing stocks higher towards the final weeks of last year.
However, it is rather unlikely that 2020 will shape up to be like 2019 by staging another strong rally. While stock valuations are not cheap, they are not in bubble territory either. Given that the market is not grossly overbought or overleveraged unlike the dot–com era or the housing bubble, probability of a crash is also rather unlikely.1
The most probable outcome how 2020 will end off is likely a slightly up or slightly down scenario depending very much on the outcome of the US presidential election come November 2020 where Trump seeks his second term.1
Trade tensions
Phase One trade deal agreement could be signed on January 15th at the White House where the US will suspend tariffs on Chinese imports including smartphones and toys, while China will agree to buy more US agricultural products and commit to improve intellectual property protections.5
Prospects of an agreement and improvement in trade tensions have also prompted the International Monetary Fund to say that its officials may revise up global growth forecast in 2020.5
However, trade tensions on the European front could escalate after US trade representative, Robert Lighthizer criticized the “very unbalanced relationship“ in trade and stoked fears that a US–EU trade war could tip the German economy into recession.2
Trump & US Markets
The S&P500 has gained more than 50% since Donald Trump was elected, more than double the 23% average market return on presidents three years into their term.3
Markets in 2019 were boosted by:
- The Fed slashing interest rates three times in 2019, the first time since the end of the financial crisis.
- One of the tightest labour markets in history, with unemployment rate currently at 3.5%, its lowest since 1969, which prompted US consumers to spend more.
- Businesses also benefitted from Trump's 2019 tax overhaul, with companies buying a record number of shares back with the extra money.
So how will Trump's fourth year look like in 2020?
Markets often do well in an election year, partly because the White House incumbent has every incentive to make people feel richer. Trump is rumoured to be considering a fiscal boost known as “tax cuts 2.0” which could lift his popularity and stocks before the November election.2
Wall street strategists predict the S&P500 will gain 5% in 20202, and Trump will need a 6% gain to beat the average presidential return on the fourth year.3
China
China central bank said that it would cut the amount of cash that banks must hold as reserves, releasing around 800 billion yuan in funds effective Jan 6.4
China's economy is likely to keep cooling in 2020, having slowed to its slowest annual growth rate in 2019 at 6%, and is expected to continue sliding even further to 5.7% in 2020 and 5.6% in 2021 unless the government puts in place a more aggressive stimulus programme.2
Central bank policy
The US Federal Reserve is expected to leave interest rates on hold in 2020 but could also slash rates if economic data deteriorates.
The European Central Bank (ECB) under new president, Christine Lagarde, is not expected to change the ECB's dovish stance, hence interest rates could remain at record lows for some time.
In the UK, interest rates could be cut if the UK economy falters once Brexit takes place on 31st January.2
UK & Brexit
Following the resounding victory of UK Prime Minister Boris Johnson at the Dec 12 general election, there is now more clarity for investors that Brexit will be done, even if it ends up being a hard exit.1
However, relief that Brexit is resolved will be replaced by anxiety over the future relationship between Britain and the EU, with the transition period due to end in December 2020.2
The FTSE100 has shrugged off Brexit woes and gained 12% in 20196, with several analysts predicting it will rally further in 2020 as relatively unloved UK shares are embraced by investors again.
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Information is correct as of 09/01/2020.