Monthly Commentary – January 2020

As investors processed some distinctly mixed news, global stockmarkets made a subdued start to 2020. Steps towards resolving the US-China trade war and Brexit were offset by worries about a US confrontation with Iran and the coronavirus outbreak in Wuhan.

In mid-January, the US and China signed their ‘phase one’ trade accord, signalling a ceasefire after 18 months of trade war. A final resolution remains elusive, but the truce looks set to hold during the run-up to the US presidential election. In the UK, Parliament approved Boris Johnson’s Brexit deal, allowing the UK to leave the European Union on 31 January. Although the future trading relationship is yet to be agreed, the greater clarity is helpful for investors. We see an opportunity for a recovery in UK stocks, including a number of our investments.

Against these positives, markets were rattled by a flare-up in the Middle East after the US killed a top Iranian general. Iran launched a retaliatory airstrike, although thankfully there was no further escalation. Worries surrounding global economic slowdown intensified as the novel coronavirus spread rapidly in China. As a key ‘growth engine’ of the world, China’s measures to halt the outbreak look likely to have a dampening effect on the global economy. This was particularly troublesome for the shares of companies directly affected, such as airlines, but it also weighed on the energy sector on fears of reduced consumption in the near term. Amid conflicting news for the global economy, the Bank of England was thought likely to be considering a rate reduction, but it ultimately followed other major central banks and took no action.

North America was the sole region to deliver positive returns, helped by the strong performance of a small number of large companies. Latin America fared worst, on fears about global growth. The UK was held back by weakness in its large resources sector. With China being at the centre of the coronavirus outbreak, Asia-Pacific stocks underperformed.

As investors sought safe havens, defensive sectors did well while most cyclicals underperformed. Energy and materials led the declines, reflecting the likelihood of depressed Chinese demand for resources in the near term. Financials were also weak. Utilities performed best, while telecoms and consumer staples also produced positive returns. Despite what we see as stretched valuations, information technology did well too as some of the tech giants announced results that satisfied investors.

One beneficiary of the month’s defensive tone was portfolio holding United Utilities. This company provides water and waste services in the northwest of England. Its shares responded to rebounding confidence in the UK given the greater clarity provided by the general election. The election outcome removed the threat of nationalisation proposed by Jeremy Corbyn. As a defensive investment that is less susceptible to swings in the broader economy, United Utilities gained amid concerns about the pace of global economic demand. It was also helped by a favourable regulatory framework, recently set out by Ofwat, which supports the company’s ability to pay an attractive dividend.

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.