- In December, global equities gained 3.4% (MSCI AC World in USD) despite a decline right at the end of the year in very limited trading volumes.
- The yield on the German 10-year Bund, which stood at -0.36% at the end of November, ended the month at -0.19%, giving a monthly rise of 17bp.
- December was characterised by a depreciation of the US dollar against developed currencies (-1.9% for the DXY index) and against emerging currencies (-2.5% against a basket of 10 currencies) as the global environment appeared to be less risky.
The first sessions in December were marked by erratic movements in equities after new global trade alerts. There were reports that a deal with China would be delayed until after the US election in November 2020, while Donald Trump threatened to tax certain products from the European Union.
Subsequently, China's trade negotiations with the US quickly developed favourably. Donald Trump spoke of a ‘very large deal’ and China’s leaders confirmed that a partial (so called ‘phase 1’) agreement could be reached.
The new tariff increases on Chinese products (including electronic goods), which were due to enter into force on 15 December, were cancelled. The tariffs that have been in place since 1 September have been reduced. A week later, China announced a reduction on tariffs on US products in 2020 (agricultural goods as early as January, technology products in July). A signature of the agreement is now expected in early 2020, on 15 January according to an announcement by President Trump.
Other factors that have governed financial market developments in recent months facilitated global equity gains in December.
On the one hand, the perception of the economy improved thanks to the release of better-than-expected data, which reduced fears of a recession.
On the other hand, the major central banks (the US Federal Reserve and the ECB in particular), while delivering a fairly favourable assessment of growth, made it clear that monetary policy will remain accommodative in 2020.
A happy ending to a good year for equities
The third consecutive monthly rise on the MSCI AC World took the index to a 24.1% increase in 2019 (after losing 11.2% in 2018). Emerging market equities posted a more modest rise (15.4%), but significantly outperformed in December (+7.2% for the MSCI Emerging index in USD). This was driven by relief that the trade negotiations between China and the US will finally be concluded, and by the recovery in cyclical sectors.
Within developed markets, US indices outperformed and reached record highs. The House of Representatives' decision to refer Donald Trump to the Senate for impeachment had no adverse impact on the equity market. The S&P 500 finished the month up by 2.9%. Outperforming sectors were energy, due to the 10.7% rise in oil prices (to USD 61 per barrel for WTI), technology and healthcare.
In Europe, the biggest rise was recorded by the UK Footsie 100 following the Conservative party's historic victory in the 12 December elections. This provides Boris Johnson with ample room to arrange the UK's exit from the European Union.
The EURO STOXX 50 posted a rise of 1.1%, bringing its annual increase to 24.8%. In France, the CAC 40 (+1.2%) closed several times above 6 000 points, which had not happened for 12 years, and gained 26.4% in 2019.
Despite the improvement in business surveys in Germany, the Dax index finished practically flat in December (+0.1%). The change in leadership of the Social Democratic Party (SPD) appeared to undermine the governing coalition, which may explain investors' caution as the country flirted with recession.
Among eurozone equities, the sectors most sensitive to the rise in long yields underperformed or even fell (telecommunications). Conversely, cyclical stocks and banks markedly outperformed.
In Japan, the Nikkei 225 index gained 1.6% in December and 18.2% over the year. Cyclical and export-related stocks outperformed. Concerns about consumer spending trends after the VAT rate hike in early October weighed on domestic stocks.
Graph 1: Total returns in 2019 (% in local currencies as of 31/12/2019)
Moderate rise in long-term yields
In the last trading session of the month, the German 10-year Bund yield rose sharply from -0.25% to -0.19% in very low trading volume.
A more significant development occurred at the ECB's monetary policy meeting on 12 December.
Christine Lagarde's comments convinced investors that a long period of status quo on policy rates would be observed. The ECB's assessment of the growth prospects is quite positive, but inflation forecasts for the medium term are still prudent. The slight improvement in economic indicators, especially business surveys in Germany, contributed to the shift in the direction of long-term yields.
These variations have not led to an underperformance of 'peripheral' markets despite a somewhat more turbulent political environment.
Graph 2: Long-term yields in % as of 31/12/2019
So much for the past; now comes the time to look ahead
Although some risks seem to have receded in the short run, the events at the end of 2019 do not seem to us to be a game changer.
A Phase 1 US-China trade agreement in January would be good news, but other aspects of relations between the two global giants will continue to be negotiated, and US pressure may be exerted on other trading partners.
The election year in the US is opening a phase of uncertainty in which equity investors should focus on the Democratic Party presidential primaries. Polls and the results of Democratic voter consultations in the key states may lead to erratic equity movements.
Donald Trump's impeachment trial, which could begin in January, is likely to move to a vote on acquittal, given that the Republican Party has a majority in the Senate. This particular situation for an outgoing president is likely, however, to reinforce doubts about the outcome of the November elections, with every step of the process giving rise to many comments.
From an economic point of view, the outlook has improved in recent weeks. The improvement in business surveys has reduced concerns of recession, which had pushed long bond yields to low levels over the summer.
We reiterate our view of modest, but tangible growth in 2020. Central banks should remain dovish, but the risk of an acceleration in inflation cannot be ruled out entirely.
The environment is still a priori favourable to risky assets in the medium term, but several factors require maintaining a reactive approach and diversifying asset allocation so that alternative scenarios can be dealt with.
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