Market Review January 2020
China grabbed the headlines again in January, but this time not for trade. On 31st December, the Chinese authorities notified the World Health Organisation of an outbreak of the Coronavirus in Wuhan City and in doing so, relegated the trade war and the World Economic Forum in Davos to mere sideshows throughout January.
The Chinese authorities have been praised for how they have reacted to the outbreak, showing that lessons have been learned from the SARS epidemic in 2003. Whilst Coronavirus fears unsettled markets in January, it is important that investors also learn lessons from the SARS outbreak which saw markets fall sharply only to rebound even stronger once the virus had been contained; based on the market reaction to the news that there has been a breakthrough in the search for a Coronavirus vaccine, markets seem to be treading a similar path this time around.
Despite a positive start to the year, the Global equity markets, as measured by the MSCI World index, declined in January as the spread of coronavirus reduced investors’ appetite for risk. Assets perceived as safe havens, such as government bonds, performed well.
Strong momentum from the end of 2019 continued into January as US equities rallied strongly with the S&P 500 hitting a new record high in the middle of the month before giving up the gains to end the month flat. Trade tensions that proved to be a headwind for markets for much of 2019 eased with the phase one US-China trade deal, signed as expected on 15 January.
US economic data remained broadly stable with the unemployment rate remaining at a 50-year low of 3.5%. Q4 GDP was in line with expectations, growing at 2.1% quarter-on-quarter (annualised).
In the second half of the month, mounting fears over the spread of coronavirus, in China and beyond, erased the early stock market progress as Trump imposed temporary travel bans upon non-US citizens travelling to the US from China. Investor concerns over disrupted supply chains and weakened demand led to fears that growth could slow.
Eurozone equities had a weak start to the year amid fears over the potential impact of the coronavirus on global economic activity. The MSCI EMU, an index of large eurozone companies, returned -1.7% in January.
Despite the weak start, Jobs data remained encouraging with the unemployment rate down to 7.4% in December, the lowest rate since May 2008 whilst forward-looking indicators showed stabilisation at low levels, with the flash composite purchasing managers’ index (PMI) for January steady at 50.9. (50 is the level that separates expansion from contraction).
UK equities fell over the period. The end of January marked the UK’s official departure from the EU and its entry into a transition period. Sterling was volatile, recovering sharply towards month-end after the Bank of England (BoE) kept interest rates unchanged, confounding market expectations which had predicted a cut. The Monetary Policy Committee voted to hold rates steady as indicators of future activity started to recover following the decisive general election outcome in December.
Forward-looking indicators suggested there has been a sharp recovery in the confidence of the UK consumers and corporates since the election. IHS Markit/CIPS confirmed that its composite purchasing managers’ index (PMI) had recovered above the 50 mark suggesting expansion. Meanwhile, the CBI’s quarterly industrial trends survey found that the proportion of manufacturers expecting business conditions to improve was 23% larger than the share predicting them to worsen.
Asian equities declined in January amid concerns over the impact of the coronavirus outbreak would have on on economic growth. This decline was despite an initial improvement in sentiment mid-month, as the US and China signed a phase one trade deal as expected.
Thailand and the Philippines were the weakest markets in the region, with tourism expected to be impacted by reduced visitors from China. South Korea lagged as the prospect of weaker global growth, and the risk of component shortages from China weighed on the outlook.
By contrast, Pakistan posted a small gain and was the only Asian market to finish in positive territory. India recorded a small negative return but outperformed the index as its less open economy sheltered its equity market from global growth concerns.
Given the potential negative implications for Chinese economic growth, global commodity prices came under pressure. Against this backdrop, Brazil, Chile, Colombia and South Africa all underperformed, with currency weakness amplifying negative returns. In South Africa, the central bank unexpectedly cut its headline interest rate by 25bps, amid ongoing weakness in economic growth.
Turkey recorded a positive return and outperformed as the central bank cut its headline interest rate by 75bps, more than expected, to 11.25%. Egypt was the best-performing market in the index, supported in part by currency strength. The central bank left its key interest rate unchanged, against expectations for a 50bps cut. Mexico posted a small gain, as trade-related uncertainty eased following President Trump’s signing of the US-Mexico-Canada-Agreement (USMCA).
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