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WeekWatch 06/01/2020

WeekWatch 06/01/2020

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Back in 2008, Ford took apart a Ford Focus and had several of its parts strung as musical instruments, among them a ‘clutch guitar’ and ‘window harp’. In the ensuing TV advert, a 15-strong orchestra played a piece together. “Beautifully arranged”, proclaimed the advert’s sign-off.

At the close of the 2010s, the auto-orchestral cross-over was ignobly reversed, as Carlos Ghosn, the 5’6″ former CEO of Nissan, fled Japan hidden in the double bass case of a group of ex-special forces soldiers disguised as a Gregorian music band – presumably a little less than “beautifully arranged”. (Ghosn faces charges in Japan of falsifying records for personal gain.) On New Year’s Eve, Ghosn was pictured celebrating his improbable escape at dinner in Lebanon.

He certainly wasn’t celebrating the share price, which fell both last year and across the decade as a whole; indeed, it’s even down in early trading in 2020. Still, despite his supposed crimes, it’s not all his fault. The S&P 500 Automobiles index – a pretty good picture of US sentiment about the industry – had a pretty indifferent decade. (The latest UK data, released this morning, showed automotive sales at a six-year low.) One of the principal reasons, of course, has been the threat of new technologies.

The companies bringing that technological change have also led stock gains throughout the decade. The S&P 500 ended 2019 up by a stunning 29%, but was significantly outdone by its constituent FAANG stocks, especially late in the year. Across the 2010s as a whole, the index gained 190%, but the FAANGs delivered many of the gains: the S&P 500 Information Technology index rose by 335% over the 2010s.

It wasn’t just the S&P striking new highs. The Nasdaq broke through 9,000 points for the first time over Christmas, aided by a surge for retail stocks: Amazon had its best day on markets in several months. The Dow Jones Industrial Average, meanwhile, clocked its 21st record close of 2019. It has, in short, been an expensive year – and expensive decade – to remain out of the market, despite the many surprise events that hit markets in the short term.

“The big temptation for investors is to see the news and do something new, but it’s all too often a mistake,” said Tom Beal, CIO at St. James’s Place. “The last decade has shown why investors need to keep their plans for 2030 in mind, and worry much less about what 2020 might have in store.”

As ever, stocks were particularly sensitive to developments in the US and China, and investors found cause for hope over the holiday season: an initial US–China trade deal was agreed; Hong Kong showed signs of recovery in December; Huawei reported revenues were up 18% despite ongoing US pressure; US jobs figures came in positive; and the People’s Bank of China announced a cut to the bank reserve requirement – effectively a supportive move for markets.

There were more technical financial reasons for optimism too, among them the US yield curve. It had inverted earlier in the year, meaning that two-year debt was offering better yields than 10-year debt; such an inversion has occurred before every US recession of the past 50 years. However, the year closed with the inversion very much undone; bond investors would seem to think that an imminent US recession is now unlikely.

There were plenty of tensions, all the same. Angered by UK government comments on Hong Kong, China halted the Shanghai-London Stock Connect, an alliance which allowed companies listed on one of the cities’ exchanges to apply to sell on the other. In 2019, Huatai Securities became the first (and only) company to use the link, raising $1.54 billion on the London Stock Exchange as a result.

More seriously, the US acknowledged that it was behind the assassination of a leading Iranian general in Baghdad on Friday morning. The killing comes after the US has made every effort to pull troops and support out of the region, leaving Russia and Iran potentially greater latitude. The price of a barrel of Brent rose, and is now above $70. In crude terms, the US can perhaps afford to pull out of the Middle East more than just a few years ago, given its own shale oil industry; but the global flow of oil could still be affected. The same day as the assassination, Russia, China and Iran announced they would be holding joint naval drills in the Gulf of Oman, a key channel for global oil flows and traditionally on the patrolling route of the US Fifth Fleet.

Yet for all the uncertainties of the new decade, new research by AllianceBernstein shows that bank and household debt – the two major debt piles of the global financial crisis – had been brought under control by decade-end. Moreover, European government bonds – a byword for crisis in the early 2010s – outperformed their peers over the decade. As for the UK, while manufacturing and retail indices, together with growth forecasts, looked far from impressive, the final quarter of 2019 saw sterling rise significantly and business confidence lift in December.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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