Richard Flax, Chief Investment Officer, Moneyfarm
2019 was a better year than most people expected in financial markets.
If you think back 12 months ago, the concern was really around monetary policy in the US. The Federal Reserve was in the middle of hiking interest rates and there were concerns that it was going to over-tighten and put the economy into recession.
Looking back from today, we see that the Federal Reserve changed tack at the start of 2019 and began to cut interest rates. This should prove supportive for growth in 2020 and we’ll come back to that in a second. But when we think back to 2019 and really what changed in terms of market expectations it was fundamentally around monetary policy and changing expectations of interest rates, rather than anything about stronger global growth or great corporate profitability.
When we think about 2020, for us it’s really about global growth. When you look at the policy mix, you’ve seen a bit of a tailwind from monetary policy in the shape of lower rates and that should help support global growth next year.
When you think about trade policy, it’s a little less clear. The US and China are still hammering out the final terms of their deal, but we can’t guarantee that that’s really going to come into play and even if it does, the long-term relationship between the two remains unclear.
And lastly there’s fiscal policy. You might expect governments to increase their spending going into 2020. It’s certainly something that Central Bankers have called for. That could help support global growth, but it might also have an impact on government bond yields if governments start issuing a lot more debt and on equities if they start increasing taxes, for instance, on corporates.
When we look at the US in 2020 we see an election year and we’ve seen a number of proposals from Democratic candidates that would increase corporate tax rates quite significantly. That might be socially desirable in terms of raising increased revenue, but it’s likely to have a negative impact on US equities.
So when we look at the direction of 2020 particularly in the US, the political calendar; when a Democratic candidate is finally selected and as the US election campaign gets underway, those are the sorts of things that could have an impact on US financial markets as we go through.
Now let’s turn to the UK election, which is fast approaching.
When we think about in this election, we see some similarities to what we saw two years ago – a strong Tory lead in the polls that gradually comes down as the election date approaches.
That has a couple of implications for financial markets.
We think that a Tory majority would be taken well, despite the uncertainties about what the UK’s relationship with the EU would actually be.
A Labour majority, we would argue, will be taken negatively given the shape of their policy prescriptions and some of what they’ve said in their manifesto.
A hung parliament, or no clear majority, we’d argue is not a particularly good outcome for the UK. Even if it suggests to some people that a second referendum is in the offing, we still think that the precise nature of the UK’s relationship with the EU, and with its component parts, is very much up for debate. And that’s probably not an environment in which you’ll see a lot of investment spending from companies or a particularly positive outlook for UK financial assets.
The real danger, we think, is at the end of this election we’ll see a parliament that doesn’t look very different from the one that we’ve had up until this point, reflecting a country that remains deeply divided about what the right path is, not just for its relationship with the European Union, but in terms of the policies that it should follow. And we think that that can cast a little bit of a cloud over UK financial assets.