Trading places: battle of the superpowers

12 min read 9 Jan 20

Summary: Equity markets were surprisingly upbeat in 2019, despite slowing economic growth, ongoing trade disputes and geopolitical tension. Can markets deliver again in 2020? Investment Specialist, Kirsty Clark reviews the ‘Phase one’ US-China trade agreement and looks at how markets could react in 2020.

As we usher in a new year, we can reflect on how markets performed in 2019, and also look at what lies ahead for investors in 2020.

Last year we saw synchronised gains across asset classes. Equity markets were surprisingly sanguine in the face of ongoing trade disputes, rising geopolitical tensions and slowing global growth.

Political uncertainty in the US and the UK did little to dampen equity markets in 2019, helping the S&P 500 log its strongest annual return since 2013 – the total return index delivered over 30% in US dollar terms. In the UK, the FTSE 250 Index of mid cap stocks was also among the top performers in 2019. Emerging markets gained ground over the year, but lagged their developed market counterparts.

However, in December, we saw a change in market leadership, with better-than-expected economic data and the prospect of a partial US-China trade deal driving some regional market rotation.

Emerging markets took to lead over the month, outperforming US and Eurozone equities.

UK equities were the standout performers in December, with small and mid-cap names staging a relief rally following the decisive Conservative victory in the General Election. The pound also strengthened against the US dollar.

In commodities, Brent crude and gold managed to secure additional gains over the month. Italian and German 10-year bonds also nudged into positive territory, while US 10-year treasuries lost ground and the dollar weakened.

At a sector level, investors continued to favour more cyclical areas of the market, with energy and materials stocks joining technology names in leading equity markets higher.

As we enter a new year, we also enter a new decade and, while we expect to see continued growth, we may not see a repeat of the combined tailwinds that spurred growth over the past decade – a period dominated by low inflation, loose monetary policy, low bond yields and inflated asset prices.

A new decade brings fresh opportunities and challenges. Structural shifts in global demographics, politics, regulation and technology will shape the direction of capital flows and growth opportunities from here. In an increasingly ‘tech-driven’ world, we could see an uptick in the pace of change, and businesses will need to adapt and innovate to remain competitive.

Change may, indeed, be constant…but what few had doubted, was the old certainty of ever-greater global interconnectedness. However, with protectionist agendas on the rise, we could be edging away from an extended period of global integration, to one characterised by increasing isolationism.

Global trade openness has soared since the end of World War II, but rising populism and economic protectionism are beginning to challenge this decades-long trend.

Heightened geopolitical risks and increased barriers to trade are likely to put further pressure on international organisations – such as the World Trade Organisation, the United Nations, the International Monetary Fund and the World Bank – to meet the challenges of a new world order.

Global uncertainty has been on the rise in the wake of President Trump’s America First agenda, and the UK’s vote to leave the EU.

In the near term, the ‘uncertainty hangover’ from 2019 is likely to stay with us until we have a signed ‘Phase one’ US-China trade agreement, and further details on any post-Brexit cross-border arrangements.

While some encouraging economic data and easing trade tensions have boosted sentiment more recently – any breakdown in future discussions, or rise in geopolitical conflict, could derail markets and weigh on growth in 2020.

Investors and businesses have welcomed a de-escalation in the long-running US-China trade dispute, but both will be looking to Washington and Beijing to make solid commitments and set a timeline for ongoing discussions.

The details of the partial trade deal cover areas including intellectual property, technology transfer, agriculture and financial services, along with currency and foreign exchange – and address a wide range of tariff and non-tariff barriers.

In essence, the agreement commits China to buying more US agricultural goods and improving market access for US financial services groups, in exchange for US tariff relief on Chinese imports.

In addition, the agreement has provisions to combat any perceived currency manipulation by China. It also tightens protection for US intellectual property, and it calls for China to end its long-standing practice of forced technology transfer as a condition of gaining market access.

The issue of intellectual property theft has long been a bone of contention on the US side and, while this agreement attempts to address some of these concerns, underlying issues remain.

Time will tell if the US and China can settle on a new playing field, or if this agreement simply patches over more deep-seated issues.

In the Chinese horoscope, 2020 ushers in the Year of the Rat; signifying a period of renewal. Let’s see if Presidents Trump and Xi Jinping can ‘Rat’ify the ‘Phase one’ agreement this month, and embark on their own period of renewal.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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