Volatility, a guest star?

Thu 06 Feb 2020

Read our full Monthly Market Update February 2020

The month in review: Coronavirus fears weigh on equity markets

Despite a positive start to the year, January was a negative month for risk assets. Earnings marginally outperformed expectations in the US, with Amazon and Apple rallying on stronger than expected revenue growth and J.P. Morgan posting its highest ever revenues from trading in a single quarter, helping to push the S&P 500 index higher initially. However, fears stemming from the coronavirus outbreak sent growth expectations for China lower, with tourism and entertainment stocks selling-off as a result. Global stocks were down -0.1% in Sterling terms and -0.6% in local currency terms in January. Emerging Markets equities have been particularly hit, down -4.2% in Sterling terms. Capital fled to the fixed income markets, with ten-year gilt yields down 29.8bps, closing at a yield of 0.52%. US Treasuries yields also fell, with the ten-year treasury closing at a yield of 1.51%. Globally, utilities and IT stocks were the best performing sectors, while energy stocks failed to keep up with the wider market as crude oil prices fell.

January 31 marked the day that the UK left the European Union. The next stage in the process will see trade deal negotiations across the world, with EU, US and Japan deals potentially on the horizon. Currency markets will likely see continued volatility as talks unfold, in particular GBP/EUR will be sensitive to rhetoric out of both Brussels and Westminster as we approach the 2020 deadline. Particularly thorny issues for the deal revolve around regulation standards and access to fishing waters. Meanwhile the first phase of the trade deal signed by both China and the US provides some clarity and stability for financial markets in the short term, however long term issues such intellectual property theft remain unresolved.

Our latest investment committee in January 2020 felt that, although little more clarity has been achieved (mostly on the Brexit front), the sheer availability of cheap capital and scarcity of risk assets create favourable demand/supply dynamics for equities. Therefore, we decided to add 2% to our allocation in UK small caps, from cash. We also switched holdings in index-linked gilts to traditional gilts to mitigate risks around future inflation calculations that feed into the pricing of these instruments. We don’t have strong geographical preferences at this point. We still believe that the cycle, for the time being, remains intact despite increasing signs of maturity.