Global equities were mixed over the month. The emergence of the coronavirus in China and its potential to become a global health problem led investors to reduce their outlook for global growth. Global bond yields declined, yield curves flattened, and the US Dollar rallied. Unsurprisingly value stocks underperformed. US equities and particularly technology outperformed. In local currency terms the UK was an underperformer.
Despite the pullback, our enthusiasm for UK equities remains undiminished. Speculation that the Bank of England would cut interest rates at its January meeting proved unfounded and sterling rallied. We continue to believe the political certainty provided by December’s clear election result will lead to the UK economy surprising positively over the next twelve months. UK economic growth will improve relative to the US and significantly outperform the Eurozone. In this scenario, we expect sterling to appreciate against both the US Dollar and Euro and UK domestic equities to outperform.
The longer-term impact of the coronavirus is unknown. In the short-term the policies put in place by the Chinese authorities to control the outbreak will lower regional GDP growth as well as impacting large open economies like the Eurozone, which rely heavily on exports for growth. Global liquidity, however, remains supportive. Money supply growth picked up in the second half of 2019, most notably in the US. Not only has the US cut interest rates but in response to problems in the repo market the Fed has reversed its recent balance sheet shrinkage. The mechanism by which this liquidity impacts asset markets is uncertain, but it would be naïve to dismiss its importance. The relentless ascent of US mega-cap stocks should be viewed in this context.