January was very much a “game of two halves”, with investors responding to positive signals in the first couple of weeks, but then starting to fret over the potential damage the coronavirus might cause should efforts to bring it under control fail. By the end of the month, riskier assets were generally in negative territory, whilst safe havens, such as treasuries and gold, had posted gains.
Among the positives, we saw the signing of Phase One of the US – China Trade Deal, which at least provides something of a truce, and may pave the way towards further de-escalation as the negotiators move on to the next stage. Data releases also added to the positive environment, with strong corporate earnings reports boosting investor confidence. In the US, approximately 75 percent of companies reporting in January managed to beat analyst forecasts, whilst in Europe, the same measure came in just below 60 percent.
In other news, the last day of the month saw the UK finally depart from the EU (legally at least), although little else changed, as the UK and EU have now entered an eleven month transition period when they will attempt to negotiate the terms for a new relationship across various issues, such as trade and security. With both sides apparently far apart on most issues of substance, it seems likely the process will be acrimonious, with no guarantee a satisfactory deal will be forged, or even that a “hard” Brexit can avoided.
Tensions between the US and Iran erupted over the US assassination of Quassem Soliemani, although both sides showed little appetite to escalate matters to a full confrontation, which allowed the issue to gradually fade from the headlines. A more serious negative that gained increasing attention towards the end of the month was the coronavirus outbreak, and its potential economic impact. At the time of writing, it remains unclear whether efforts to quarantine sufferers (in some cases whole cities) will be enough to control the spread of cases. What does seem clear however, is that at the very least, short term economic activity in China will be taking a significant hit.
Despite the excellent start to the year, late January weakness linked to the coronavirus scare saw the MSCI AC World Index decline -0.6% in sterling terms. Unsurprisingly, Asia ex Japan (-4.0%) and the Emerging Markets (-4.2%) were the regions most troubled by the issue, whilst the US (+0.7%) and Europe ex UK (-1.6%) held up better. As a general rule, cyclical sectors underperformed, with Energy (-8.5%), Materials (-5.2%) and Financials (-2.7%) the worst hit, whilst more defensive areas, such as Communication Services (+0.5%), Information Technology (+3.3%) and Utilities (+5.4%) performed relatively well. Finally, in terms of style, Growth (+1.7%) materially outpaced Value (-2.9%), whilst Larger Companies (-0.6%) fared better than Smaller Companies (-2.4%).
Increased risk aversion helped safe haven long dated government bonds top the performance table within fixed income, with the JP Morgan Global Government Bond Index rising +2.2%. High quality corporate bonds also benefited from falling interest rates, although a widening of spreads meant the ICE Merrill Lynch Global Corporate Investment Grade delivered a slightly more modest +2.0%. This was also true for the riskier sub-sectors, such as those represented by the ICE Global High Yield Index (+0.3%) and the JP Morgan Global Emerging Market Bond Index (+1.5%), (all hedged to US dollars).
The Bloomberg Commodities Index fell -6.9%, with returns across different subsectors spanning a wide range. Safe haven Gold (+4.5%) led the way, with the more economically sensitive areas, such as Industrial Metals (-6.8%) and Energy (-14.6%), bringing up the rear.
In the foreign exchange markets, the main story was the weakness of a number of emerging market and commodity related currencies. Measured against the pound, the Australian dollar fell -4.5%, the Canadian dollar -1.5%, the Brazilian real -6.1%, and the South African rand -7.2%.
(Notes: All monthly data is quoted in sterling terms unless otherwise stated)
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