Investment Update - January 2020

Written by Graham Bentley, Avellemy Investment Committee Chairman.

The investment New Year has proved to be rather more eventful than perhaps many of us would have preferred.

The positive sentiment that followed the US and China Phase 1 trade deal was tested almost immediately - briefly (as it turned out) by tensions between the US and Iran following the US air strike that killed a top Iranian military commander, and then in mid-January by the outbreak in Wuhan, China of the pneumonia-like illness caused by the Corona virus. While the SARS outbreak in 2003 had a mortality rate of around 10%, as I write this, there are approaching 25,000 confirmed cases worldwide, and 492 deaths; this is a significantly lower mortality rate of 2%. Moreover, reports are emerging that UK scientists had made a ‘significant breakthrough’ in their work on a coronavirus vaccine, while a team of researchers at Zhejiang University had found certain drugs could inhibit the virus.

While it remains difficult to predict the global economic impact of the disease - symptoms cannot be identified for two weeks - it is clear in China at least the 'lockdown', travel bans etc are having a short-term impact as people stay in their homes. Potential weaker global growth saw oil prices drop by 12%.

Corona virus aside, the US economy continues to produce sparkling corporate results, with Q4 2019 numbers showing earnings and sales growing strongly. Unsurprisingly therefore, at its January meeting the US Federal Reserve elected to leave the interest rates that determine bank lending rates and the cost of credit for borrowers unchanged at 1.5 - 1.75%. In dollar terms, the S&P500 was virtually unchanged during the month.

European markets were down 1% in local currency terms. Growth remains weak although manufacturing data improved significantly; as trade improves on the US/China deal, those companies should benefit. As with their peers in the US, the European Central Bank, under the new leadership of Christine Lagarde, kept interest rates unchanged.

The FTSE All Share index was down 3.25% over the month, despite some encouraging economic data. The purchasing managers' index, which reflects the manufacturing and service companies' activity, rose to a level that indicates a general expectation of improvement in new orders, factory output, employment and so on. Notably, the UK has now set out on its journey toward new trade agreements, as we left the European Union on the 31st January. It will be a huge effort to complete these negotiations before the end of 2020, and it is likely therefore that from time to time during the coming year, the threat of a "hard" Brexit may reappear as speculation on the projected outcomes intensifies.