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Economic and Strategy Viewpoint January 2020

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Economic and Strategy Viewpoint January 2020 Economic and Strategy Viewpoint January 2020 3 2019 review: Liquidity driven rally – We look back at a year full of challenges for investors as trade wars flared up again, the UK was beleaguered by Brexit, while unrest and protests elsewhere in the world kept investors on their toes. – Following the disastrous end to 2018, almost all asset classes got off to a strong start in 2019. Top quintile total returns were achieved for both equities and bonds, which Keith Wade was helped by central banks loosening monetary policy. Chief Economist and Strategist 13 Strategy note 2020: reality bites? – Investors were able to ignore the weakness of corporate earnings in 2019 as markets re-rated following the easing of monetary policy by the US federal reserve and other central banks. – As we head into 2020, the profits outlook remains difficult given margin pressures. Moreover, equity markets already appear to be pricing in an economic rebound and in the absence of a significant liquidity impulse and further re-rating, returns are likely to be constrained to single digits. Azad Zangana Senior European Economist Chart: Equity and bond returns since 1900 and Strategist Equity returns distribution Bond returns distribution 2012 2015 2004 2011 2016 2001 2007 2014 Positive years : 109 (73%) 2017 1983 Positive years : 101 (85%) 2005 2012 Negative years : 40 (27%) 2016 1974 Negative years : 18 (15%) 1994 2010 2015 1973 1992 2006 2006 1964 1987 2004 2005 1954 1984 1993 2017 2003 1949 1978 1988 2009 1996 1948 1970 1986 2003 1980 1939 1960 1979 1999 1979 1938 2018 1956 1972 1998 1977 1935 2019 2000 1948 1971 1996 1972 1930 2010 1990 1947 1968 1983 1968 1929 2007 1981 1923 1965 1982 2019 1965 1923 1992 1977 1916 1964 1976 2013 1963 1920 1990 1969 1912 1959 1967 1997 1961 1918 1988 1962 1911 1952 1963 1995 1953 1917 1981 1953 1906 1949 1961 1991 2018 1952 1916 1975 Craig Botham 2001 1946 1902 1944 1951 1989 1987 1946 1915 1966 1973 1939 1899 1926 1943 1985 1978 1944 1914 1957 Senior Emerging Market 1966 1934 1896 1921 1942 1980 1967 1943 1913 1945 2014 1957 1932 1895 1909 1925 1975 1959 1942 1912 1940 2002 Economist 1941 1929 1894 1905 1924 1955 1958 1941 1911 1936 2000 1940 1914 1892 1901 1922 1950 1956 1937 1910 1934 1998 1920 1913 1889 1900 1919 1945 1955 1933 1908 1932 1997 2002 1903 1910 1888 1897 1918 1938 1958 2013 1951 1928 1906 1927 1993 2011 1974 1893 1887 1882 1886 1898 1936 1935 2009 1950 1909 1905 1926 1984 1991 1930 1890 1883 1881 1878 1891 1927 1928 1999 1947 1907 1903 1925 1971 1989 2008 2008 1917 1884 1877 1875 1872 1885 1915 1908 1954 1994 1931 1904 1901 1924 1960 1976 1995 1931 1937 1907 1876 1873 1874 1871 1880 1904 1879 1933 1969 1919 1902 1900 1922 1921 1970 1986 1985 1982 -50 to -40 -40 to -30 -30 to -20 -20 to -10 -10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 40 to 50 50 to 60 -10 to -5 -5 to 0 0 to 2.5 2.5 to 5 5 to 10 10 to 15 15 to 20 20 to 25 25 to 30 30 to 35 Total Return, % Total returns, % Note: Equity total returns using S&P500 from 1873, and bond total returns taken from US 10-year Treasuries from 1900. Source: Refinitiv Datastream, Global Financial Data, Schroders Economics Group, January 2, 2020. Economic and Strategy Viewpoint January 2020 2 2019 review: Liquidity driven rally “A rising tide lifts all boats.” Popularized by US President John F Kennedy (1961–1963). At this time of year, we like to take a step back and review the performance of markets and the lessons we can learn for the coming year. 2019 began with a bounce in markets following an awful end to 2018. The fourth quarter had wiped out most gains for the year, leaving both the S&P500 and US 10-year Treasuries with negative returns. While there were plenty of political events last year, most were overshadowed by the US-China trade war. The conflict re-escalated early in the year, knocking investors' confidence, and forcing central banks to reverse course and ease once again. Before we look back over the performance of the major asset classes, we summarize the key events for the investment world. Trade war Trade war fears As the trade war between the US and China rumbled on from 2018, the year began returned after with relative optimism as the two sides hammered out a deal in January talks in negotiations Beijing. Negotiations continued throughout the following months with mixed signs between the US of progress until an abrupt deterioration in May. and China As is so often the case, the market disruption came via Twitter. President Trump broke down announced via tweet that the US would increase tariffs on $200 billion worth of goods from 10% to 25%, with further new tariffs to follow. With the truce broken, matters escalated quickly. The threatened tariffs were applied on 10 May, and the Chinese response came three days later: increased tariffs were announced on $60 billion of US exports, to be imposed in June. The trade war also expanded beyond tariffs, as the US placed Chinese firm Huawei on its “entity list”, barring the firm from purchasing from US firms, cutting it off from key tech components. Additional firms were named to this list in June. Following this rapid escalation, both sides took a breather in July, with new talks taking place. Immediately after their muted conclusion, on 1 August President Trump announced new tariffs of 10% on $300 billion of goods, to start 1 September. Again, the prospect of further escalation was raised should China not deliver on a deal. China responded by suspending purchases of some US agricultural goods and later announcing tariffs on $75 billion of US goods. Both sides After the September tariffs went ahead as announced, the two sides again agreed to announced new hold talks that month. Progress seemed better than at the previous round of talks and increased with the US announcing a “Phase One” deal in October and delaying a planned further tariffs, but a tariff increase. In President Trump's words, the deal would involve up to $50 billion “Phase One” deal of Chinese purchases of US agricultural products annually, stronger intellectual property protection, and greater transparency on its currency management. Nothing was close to was signed at this stage, and markets were unnerved by subsequent Chinese agreement demands for a tariff rollback from the US. With two days to go before the 15 December tariff deadline, the two sides announced that they had reached a Phase One trade deal. Full details were waiting to be finalized but the US agreed to a limited tariff rollback, reducing the September tariffs on $120 billion of goods to 7.5% from 15%. China agreed to increase purchases of agricultural products by $32 billion over two years, and total US goods and services by at least $200 billion over the same timeframe (though this seems an overly ambitious promise). China will also implement greater intellectual property protections and end the practice of forced technology transfer. The deal is set to be Economic and Strategy Viewpoint January 2020 3 signed in January 2020, with implementation to follow a month later. Markets were exuberant. Impeachment The consequences of the 2018 US mid-term elections started to become apparent early on in 2019 as the Democrats took control of the House of Representatives, with a promise to end the government shutdown, but without funding President Trump's proposed border wall. Wrangling over domestic issues continued without much impact, until 9 September, when the House Intelligence Committee was notified about an "urgent" and "credible" whistle-blower complaint. It was alleged that in a telephone conversation, President Trump promised Ukrainian president Volodymyr Zelensky $250 million if he would reopen an investigation into the son of Joe Biden, former Vice President and one of the favorites to win the Democratic Party's primary nomination. President Trump Weeks later, Speaker of the House, Nancy Pelosi announced the start of a formal had domestic impeachment inquiry, which the president refused to take part in, calling the process problems, the a "witch hunt". Apt phrasing as on Halloween, the House of Representatives voted biggest being the 232–196 in favor of formally proceeding with an impeachment enquiry against impeachment the president. process which On 18 December, the House of Representatives voted along party lines to forward is now with two articles of impeachment against the president to the Senate. He is alleged to have the Senate abused his power and obstructed Congress, becoming only the third president to be impeached by the House. An impeachment trial will now be conducted by the Senate, where the president is expected to testify. However, with the senate being controlled by Republicans, it seems unlikely that a two-thirds majority will be achieved to impeach, especially with an election due in 2020. "Get Brexit done!" The year started with Prime Minister (PM) Theresa May's Withdrawal Agreement deal being voted down by the House of Commons, followed by a vote of no confidence in the government. May survived to continue, but did not manage to win a "meaningful vote" in the House of Commons in time for the initial 31 March 2019 deadline. An extension to Brexit was granted to seek a solution to the impasse in parliament, however, indicative votes failed to shed light on a path that would carry a majority.
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