The Janus Henderson Global Snapshot explores the themes driving markets, the trends to watch, market returns and metrics, and the Multi-Asset Team’s outlook for regions and sectors at quarter end.
Global economy stabilising but recovery not yet assured
Fed on hold
13 of 17 participants at the December Federal Open Market Committee meeting expected current official rates to remain appropriate throughout 2020. The central bank injected liquidity via Treasury bill purchases and repos to ensure stable year-end money markets.
Official economic data remained weak but the Markit purchasing managers’ composite output index rose to a 21-month high in November, lifting recovery hopes. A reported “Phase One” trade deal with the US leaves the bulk of US tariffs in place.
Sales tax hangover
Retail sales plunged 6.8% in October/November from Q3, reflecting payback for front-loading ahead of the October tax hike. Consumer price inflation was little changed, with the tax boost partly offset by the introduction of free early-years education.
Incoming ECB President Christine Lagarde announced a strategic review of monetary policy in 2020. The purchasing managers’ composite output index moved sideways during Q4 while annual core consumer price inflation edged up to 1.3% in November, a seven-month high.
Two doves broke cover to vote for a quarter-point rate cut in November and December, citing rising spare capacity, low inflation and emerging labour market weakness. The Conservative Party election victory resolved domestic political uncertainty but guarantees a “hard” Brexit.
Emerging market central banks eased further in Q4 despite US official rates remaining on hold. China and Korea joined the rate-cutting while further reductions were delivered in Brazil, India, Russia, Mexico, Turkey, Indonesia, Thailand, Chile and Peru.
Trends to watch:
US money growth rebounded after August 2019, suggesting economic reacceleration from Q2 2020 after a weak start to the year. Continued monetary strength in early 2020 would argue against further Fed rate cuts and could raise medium-term inflation fears.
Policy stimulus has been offset by a tightening of credit conditions since Q2 2019 as bank funding costs rose following the failure of several regional institutions. A reversal of this tightening is needed to boost money growth and economic prospects.
The Bank of Japan (BoJ) halved its bond purchases in 2019 even as the Fed and ECB restarted balance sheet expansion. Fiscal easing and an inflation uptick could force the BoJ to step up buying to prevent upward pressure on bond yields.
German industry underperformed the rest of the eurozone in 2019, reflecting auto sector woes and a large drawdown in inventories. Stabilising auto sales and a reversal of the inventory drag could trigger a German catch-up in H1 2020.
Chancellor Javid raised current spending plans by 0.5% of GDP in the autumn and is expected to announce an investment boost in the 11 March Budget. The commitment to avoid running a current budget deficit will constrain largesse, however.
Indian credit woes
A shadow banking crisis resulted in the flow of finance to Indian businesses and households plunging 88% in the first half of fiscal 2020 from a year before. The worst is probably over but will recent policy easing spark a recovery?
Source: Janus Henderson Investors at 31 December 2019. These comments are the views of Simon Ward, Economic Adviser, and should not be construed as investment advice. These views may differ from those of other Janus Henderson fund managers.
KEY MARKET DATA
|Equity market returns for Q4 2019 (%)||Qtr local currency||YTD local currency||Qtr sterling||YTD sterling||Qtr dollar||YTD dollar|
|US S&P 500||8.53||28.88||0.96||23.90||8.53||28.88|
|Euro area: Euro Stoxx||5.14||22.97||0.70||16.09||8.25||20.76|
|UK: FTSE All Share||3.32||14.19||3,32||14.19||11.07||18.77|
|MSCI Far East ex Japan (US$)||-||-||4.34||11.98||12.17||16.48|
|MSCI Emerging Markets (US$)||-||-||3.58||10.96||11.36||15.42|
Source: Refinitiv Datastream, Janus Henderson Investors, index price returns, as at 31 December 2019.
Euro area: EU member states using euro currency (currently 19)
Asia: China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, Vietnam
BRICs: Brazil, Russia, India, China
World: G10, Eastern Europe & Africa, Asia, Latin America, Middle East.
|Forecast P/E 2019||Forecast P/E 2020||Forecast EPS growth 2019 (%)||Forecast EPS growth 2020 (%)|
Source: Refinitiv Datastream, Janus Henderson Investors' calculations, and IBES (institutional Brokers' Estimates System) estimates for MSCI Indices as at 31 December 2019. Forecast EPS (earnings per share), Forecast P/E (price-to-earnings ratio).
|Consensus GDP growth forecasts (%)||2019||2020||2021|
Source: Bloomberg, economic forecasts, as at 8 January 2020. Forecast GDP = real gross domestic product.
|Consensus inflation growth forecasts (%)||2019||2020||2021|
Source: Bloomberg, economic forecasts, as at 8 January 2020. Forecast CPI = consumer price index.
|Bonds (%)||31 Dec 2019 yield||Qtr return %||YTD return %|
|US 10-year Treasury||1.92||-2.32||7.13|
|Japan 10-year government bonds||-0.02||-1.86||0.53|
|Germany 10-year bund||-0.19||-3.77||4.82|
|UK 10-year gilts||0.83||-3.25||3.85|
|Corporate bonds: (Barclays Global Aggregate Corporate Index $)||-||-0.21||7.70|
|High yield: (Merrill Lynch Global High Yield $)||-||3.41||13.73|
|Emerging market debt (JPM Global Emerging Markets Debt $)||-||2.09||14.42|
Source: Refinitiv Datastream, Janus Henderson Investors, as at 31 December 2019.
|Currencies and commodities||31 Dec 2019||Qtr change %||YTD change %|
|S&P GSCI Total Return Index $||2591.86||8.31||17.63|
|Brent oil ($/barrel)||66.31||8.90||24.81|
|Gold bullion ($/Troy oz)||1520.50||3.17||18.66|
The above data is intended for illustration purposes only and is not indicative of the historical or future performance or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.
Please note the below are the views of the UK-based Janus Henderson Multi-Asset Team at quarter end. They do not represent a Janus Henderson house view or the views of individual fund managers and should not be construed as investment advice.
Positive Neutral Negative
|Global corporate||Strong returns but tight spreads and expensive valuations make the outlook challenging, with limited compensation for additional risk over sovereign.|
|UK gilts||Slowing macro data and political issues hint at challenges facing the UK, with scope for further declines in yields despite a low starting point.|
|Global sovereign||Yields remain low but valuations are less stretched than in corporate bonds. While total return outlook remains low, their role as a hedging asset remains.|
|Emerging market debt||Country-specific risks remain a headwind but tempering dollar strength and relatively attractive spreads present an acceptable outlook.|
|High yield||Tight spreads and low yields limit returns going forward and present asymmetric return profiles, making sovereign bonds a more useful tool.|
|UK||Brexit and sterling moves dominate the short term but competitive dividends and negative sentiment indicate potential for value with a long horizon.|
|Europe||Unloved and under-owned, Europe offers significant sensitivity to a cyclical upswing/trade ceasefire. Valuations are not as stretched as elsewhere.|
|US||Expensive region with less sensitivity to improving growth outlook. Tech and healthcare sectors vulnerable to politics as we head into November.|
|Japan||Trade war developments affect this cyclical region but Japan has a compelling valuation and would benefit from macro stabilisation.|
|Asia||Trade war headlines have improved but markets await clarity on global growth before buying cyclicality at a time of elevated valuations.|
|Global emerging markets||Trade war headlines have improved but markets await clarity on global growth before buying cyclicality at a time of elevated valuations.|
|£/$||Brexit-related volatility is expected to resurface although negative sentiment has faded out on the post-election rally. Macro weakness also limits upside.|
|£/€||Political developments seem likely to continue to drive headlines and market moves on both sides of the Channel.|
|£/¥||No outright view given political noise but the yen offers a safe-haven status in a world of positive correlations across most asset classes.|
|Property||Lower bonds yields make property look attractive but valuations are not cheap relative to history and areas such as retail look very unappealing.|
|Gold||The rally was overdone after the Iran strike hysteria. Other hedging assets offer the same level of protection but with less short-term crowding.|
|Oil||OPEC production cuts are ensuring supply side is constructive but investors are now focused on lower economic growth and geopolitics calming.|