19 February 2020

A Mixed Picture

The coronavirus outbreak continues to dominate the headlines.

On the market front, China’s efforts to limit the consequences of this epidemic on the economy was somewhat overshadowed by some rather downbeat comments from Apple over the effects on its trading position. Apple believes its business in the Far East will be adversely impacted and a modest rise in shares that took place after the People’s Bank of China introduced further monetary easing was reversed as a consequence.

Indeed, several Asian countries have revised downwards their expectations for economic growth as a direct result of the coronavirus situation. Couple that with the sluggish picture that is emerging in the Eurozone and Japan and it really does look as though global growth will slow significantly this year. While some markets have retrenched significantly, many remain close to all time highs, suggesting investors believe the overall effects of the epidemic will be transitory. Let us hope they are right.

Back home there has been positive news on the wages front, with average earnings rising above the pre-financial crisis level for the first time. But disappointing figures from HSBC and continuing concern over the trade talks with the European Union has put a dampener on both shares and the pound. Sterling had been making progress, but slipped back in recent trading, while the benchmark FTSE 100 Share Index remains well below the higher levels achieved earlier this year.

For the future we can expect the upcoming Presidential election in the US to play an increasing role in investor sentiment. In particular, the outcome of the battle to provide the Democrat’s candidate to oppose Donald Trump will be watched closely. If Bernie Sanders is chosen, expect concern that his left-wing approach will be far less business friendly than that of the current inhabitant of the White House. Michael Bloomberg might be a more acceptable figure for the business community, but he is playing his cards very close to his chest.

As is so often the case, there are sufficient uncertainties ahead to make forecasting the likely direction of markets difficult in the extreme. Yet there is one support which does not look like being removed anytime soon. Cash continues to provide little in the way of a return and inflation remains subdued. The news that National Savings are cutting further their interest rates is a further indication that interest rates are unlikely to be rising soon. Equities, with their superior yield, look attractive as a consequence.

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