Mazars Wealth Management Investment Newsletter - Winter 2020

Read our full MWM Investment Newsletter Winter 2020

Following a flat third quarter, global equities rallied to the end of the year with the MSCI World index up over 7%. Returns for unhedged Sterling based investors were broadly flat as the Pound strengthened following the Conservatives’ decisive general election victory. The late final rally was primarily driven by renewed optimism for a ‘phase one’ trade deal between the US and China, and left global equities up 25% for the year. It is of course important to note that, by contrast, markets ended 2018 in very pessimistic mood, and therefore a global equity return figure of around 8% from September 2018 is a more useful measure of equity returns.

Trade deals (or not) aside, it is indisputable that the real driver for these spectacular returns was the Fed’s complete U-turn on interest rate policy. This turnaround, together with the continued loose monetary policy still adopted by the world’s other major central banks set the environment for equity price inflation as yields on ‘safer’ asset classes once again became unattractive.

Thus 2019 ended with equities looking ‘expensive’ once more. Economic fundamentals played no part in this stock market reflation, as what growth we saw was paltry at best, and leading indicators of future economic activity gave no reason for optimism. Investors once more find themselves forced into buying equities despite a lack of corporate profit growth. Some days this feels uncomfortable, but thanks to the stance of central banks this discomfort can be easy to ignore.

And so to Brexit. Whatever one’s view of the merits or otherwise of leaving the EU, it is difficult to argue with the notion that the malaise which Parliament has been in over the last three years has not been helpful for the UK economy. Some commentators had posited that a large majority might mean the possibility of a softer Brexit, but Johnson’s decision to put a hard deadline on the date of leaving might indicate otherwise. Much has been made of the normal timescales for a trade negotiation, but what is at stake, and indeed the starting position, mean that this negotiation is far from normal.

Although uncertainty remains over the direction of Brexit, our Investment Committee decided that the definitive outcome of the election is likely to spur greater investment, making UK equities a more attractive proposition at current valuations. As such we have initiated a position in UK small-cap equities, moving marginally overweight equities as a whole, reducing cash and gold where we have been overweight. The decision was also taken to switch from index-linked gilts, which have performed extremely strongly in recent years, and instead purchase conventional gilts.

I hope you find this newsletter interesting and relevant to you, and I would very much welcome any feedback you may have. Please do feel free to get in touch with your thoughts either by phone on 020 7063 4259, or by email on david.baker@mazars.co.uk.