Equities should outperform for another year

Report says shares will continue to outpace bonds and cash in a fragile market


Equities should see another year of outperformance over government bonds and cash, while Central Banks remain critical to market performance, says Kleinwort Hambros in its new report Optimism without Euphoria.

In 2019, nearly all markets performed positively, the report states. Equities were the most buoyant, with global markets up by more than 20 per cent in sterling terms, led by the US. Other risky assets such as high-yield credit and emerging market debt performed well.

Safe-haven assets also produced positive returns. UK gilts were driven lower by a combination of Brexit uncertainty and sluggish economic conditions. Gold was a notable performer, up 15 per cent over the year in sterling terms.

The report summarises that risk assets outperformed in 2019 for two main reasons: one, as central banks signalled more stimulus to keep a sputtering economic expansion intact; two, trade war fears receded as US and Chinese negotiators appeared to have closed a “phase one” trade deal. As global economic activity generally slowed and geopolitical risks rose, investors simultaneously turned towards government bonds and gold.

The report says markets begin 2020 in a similarly contradictory state. The US and China are expected to begin work on “phase two” trade negotiations, but they are likely to be more difficult than those which occurred last year.

It says the world economy remains fragile, with growth low, and inflation muted. Moreover, in early January, a sudden escalation of tensions between Iran and the US was an important reminder that unknown and unexpected risks can manifest themselves suddenly, even as the impact of this particular event appears to have been rapidly digested.

"In the UK, expectations are for another choppy year of negotiations between it and the European Union," the report says. "This is clear from the post-election surge in Sterling having dissipated rather quickly; it hit $1.35 in the immediate aftermath of the results but fell right back to $1.30 the following week. The Prime Minister has pledged to open the fiscal taps, which should help boost aggregate spending and unblock pent-up corporate capital expenditure. This may well raise real growth prospects, which in turn should push still undervalued Sterling to between $1.35 and $1.40," it adds.

Central bankers remain critical to risk assets, according to Kleinwort. The European Central Bank has pledged to keep key rates on hold this year, as should the US Federal Reserve. The asset purchase programmes which both relaunched in late 2019 are likely to ensure that financial conditions remain extremely easy. The Bank of England’s next move is more uncertain – it may well cut rates or raise them – but it will be biased to keeping economic growth positive. There is evidence fiscal policymakers will be more active around the world – this could prove a game-changer.

FURTHER READING: Total value of UK dividends rose by 3.6 per cent in 2019

FURTHER READING: Stock markets hit new highs on China data, trade deal news

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