Weekly Market Report 08 December 2019
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Welcome to our weekly newsletter, where the Manager summarises the key market developments over the last seven days.

The Noise

Markets wavered temporarily this week as trade tensions flared with China retaliating for US support of protesters in Hong Kong, putting investors in a selling mood. Investors have been hoping that the world’s two biggest economies can make progress towards at least staving off new tariffs scheduled for 15 December on $160 billion worth of Chinese products, including smartphones and laptops.

Elsewhere, oil extended gains and then receded as traders digested the news that OPEC and allied producers agreed to tighten old supplies at a meeting this week, and the mighty Pound continued to rally, breaking out above USD 1.30 as hope built that Boris can craft a way forward for the UK.

The US jobs report will offer a gauge on the outlook for spending next week, with consumers vital to sustaining the US expansion and validate Federal Reserve Chairman Jerome Powell’s view that rates can stay on hold following three cuts. The flip side for investors is that strong payroll gains could also reduce the incentive for the Trump administration to do a deal with China.

The Numbers

GBP Performance to 25/12/19
1 Week
YTD
Absolute Level
Equity GBP Total Return (MSCI)

UK (MSCI UK)

-3.80%

10.20%

6451

Europe (MSCI Europe)

-2.80%

14.70%

6863

US (MSCI USA)

-3.10%

22.30%

8407

Japan (MSCI Japan)

-1.20%

15.00%

6762

Emerging Markets (MSCI Emerging)

-2.60%

7.10%

492

Fixed Income GBP Total Return

UK Government (Barclays Sterling Gilts Index)

-1.00%

7.60%

293

Investment Grade Hedged (Barclays Global Aggregate Corporate Bond Index)

0.10%

10.40%

302

High Yield Bonds Hedged (Barclays Global High Yield Index)

0.10%

8.90%

519

GBP Performance to 25/12/19
1 Week
YTD
Absolute Level
Currency Moves

GBP vs USD

1.90%

3.20%

1.31

GBP vs EUR

1.00%

6.50%

1.18

GBP vs JPY

1.20%

2.30%

143

Commodities GBP Return

Gold (in £)

-0.50%

11.60%

1122

Oil (in $)

-1.50%

16.70%

58

Source: Bloomberg, data as at 05/12/2019

The Nuance

When markets lack confidence, such as in the aftermath of the credit crunch, equities can track well below company earnings, making them relatively cheap. Conversely, when markets are buoyed with confidence, they may track above earnings, making them relatively expensive.

Share prices can diverge from the earnings that ultimately underpin them, which can make investors nervous. That’s why the Manager prefers to focus on underlying business profits, which compound to generate long-term returns. Doing so means it doesn’t need to fear any short-term noise and can instead seek to use it to its advantage.

Despite a year of pessimism and a significant market correction only 12 months ago, prices have already returned to an expensive level relative to earnings. This has meant that broad opportunities for equity investors have been, and remain, few and far between. With such a backdrop in mind, the Manager’s fundamentals-based approach to active investing, which capitalises on segments of the market that appear undervalued, can prove to be rewarding.

So, what should we make of the recent surge in equity prices that has yet to be followed by earnings? Given that the forecast is for company earnings to remain relatively stable for the time being, the Manager doesn’t think equities will continue a steep upward trajectory. However, if the UK delivers a market-friendly election result, and the US manages to secure a positive trade deal, then corporate earnings may start to rise once more

Quote of the week

“You just watched his team’s jaw drop to the floor”

Justin Trudeau, Canadian Prime Minister.

It was a case of gossip at the palace this week as the Canadian Prime Minister was overheard apparently badmouthing the US President over his tardiness to a meeting between the two leaders. Footage emerged of Trudeau chatting with a group of politicians, including Boris Johnson, Emmanuel Macron and Dutch Prime Minister Mark Rutte, at the NATO summit at Buckingham Palace in which he appeared to chastise Donald Trump’s decision to hold an unscheduled press conference to announce the next G-7 summit at Camp David, leaving the Canadian Premier at a loose end for the best part of an hour. The US President reacted in his usual style, calling Trudeau ‘two-faced’, backed up by his son Donald Trump Junior, who posted an image of Trudeau dressed in blackface, in reference to a controversial photo of Trudeau wearing blackface when he was a teacher nearly two decades ago.

Source: Sanlam Private Wealth

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