Monthly Commentary – December

Signs of easing trade tensions and progress with Brexit delivered some seasonal cheer for investors in December. This brought a strong year for equities to a suitably robust close.

With a looming mid-month deadline for the imposition of fresh US tariffs on China, concerns about trade continued to play on investor sentiment. But these worries were balanced by rising optimism about a trade deal. Robert Lighthizer, the US Trade Representative, declared that an interim deal was “totally done”, with an agreement set to be officially enacted in January. Meanwhile, a further escalation of the trade dispute was averted when President Trump agreed to waive the scheduled tariff increased in return for concessions from China. Trade tensions were also reduced by the approval of the US-Mexico-Canada trade agreement, although there will undoubtedly be more twists and turns in 2020.

The unexpectedly emphatic Conservative victory in the UK general election was welcomed by investors. The result removes the threat of the nationalisation of some sectors and provides some clarity on the path towards a Brexit resolution. The pound strengthened but gave back some of its gains as attention turned to the next challenge: the ambitious timeframe for negotiating a trade deal with the European Union. The UK has been one of the least-loved equity markets in the world, but we believe that there is scope for a sustained rebound as further clarity emerges.

December’s best returns came from Latin America. The region was supported by Brazil’s programme of cutting interest rates, which have reached a historic low as the country seeks to work its way out of an economic slump. With Chinese markets rebounding on positive trade developments and tentative signs of domestic recovery, Asia Pacific (ex Japan) was also strong. Despite the unveiling of a large fiscal stimulus package, Japan was a laggard, as was North America. Both still made modest gains, however.

The month’s strongest sectors were energy, materials and information technology – all helped by the improving trade outlook. Saudi Aramco, the Saudi Arabian oil producer, became the largest company to float on the stockmarket; its valuation rose to $2 trillion after its debut on the Riyadh stock exchange. The weakest returns came from the industrials sector. Boeing, the sector’s largest stock, had a poor month as it struggled to recover from safety concerns.

In the commodities markets, optimism about global trade helped the price of crude oil to rise sharply – boosting some of our portfolio holdings. Gold, another of our contrarian themes, continued to recover.

One of our best performers was Tesco – a prime example of an out-of-favour UK stock where we see potential for upside as sentiment recovers. Tesco gained more than 10% in December and, although we believe that it should benefit from a better outlook for the UK economy, the company has credible plans to revive its fortunes by improving its operations. Also helping the shares was the news that the company is considering a sale of its Thai business – a deal that is expected to generate hefty proceeds for Tesco.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.