December 2019 Newsletter

*Conservative party won an 80 seat majority at the December 2019 General Election under the slogan of “Get Brexit Done”. PM Boris Johnson called for unity and in a New Year’s message to Remain voters said “Let’s Be Friends”.

*MSCI World Index jumped 24% during 2019 he strongest performance since 2009 with the US Standard & Poor 500 gaining 29%. The Nikkei rose 18% and China’s composite index rose 36%. Global equities were encouraged by three rate cuts from the US Federal Reserve.

*Carnival Corp reported positive 2019 net income of $3.06bn with record bookings for 2020. The board expects to return to double digit earnings growth.

*Andrew Bailey FCA boss was appointed to head the Bank of England when Mark Carney’s term expires on 16^th March 2020.

*Denise Coats received a UK record £323m payday in 2019 from her firm Bet365 up from £220m in 2018.

*Hong Kong demonstrations continued over the Christmas and New Year celebrations resulting in the cancellation of New Year’s Eve festivities.

*Muddy Waters caused a collapse in the NMC Healthcare share price after reporting that NMC had engaged in various manipulations of its balance sheet and cashflows.

*House of Representatives voted 230 to 197 to impeach US President Donald Trump on the grounds of abuse of power and obstruction of justice.

Whilst the 2019 election result was partly anticipated, investors were nevertheless pleased with the clarity of a significant electoral mandate. The scale of the win, an 80 strong majority, alongside the rout of opposition parties makes it hard to envisage the Conservatives losing in 2024. This is looking like a nine/ ten year term in office, come what may. The election reduced risk.

Whilst the Johnson clique appears Thatcherite in ethos and composition, the fact the Conservatives hold previously Labour heartlands might instill a “more caring” Major-esque approach. Times have changed since the 1980s in that inflation is quiescent, taxes low, privatization of the public sector is largely complete.  Besides Brexit, investors are in the dark about Johnson’s precise economic plan. His kneejerk instinct to promise tax cuts for higher earners was quickly shelved during the leadership campaign.

2019 saw the UK return of 12.1% underperforming global and EU indices. The UK did not provide monetary stimulus over 2019. A rate cut is possible to cushion Brexit in January 2020, though the stimulus impact will likely be muted.

Hong Kong protests continued over the holiday period but in terms of achieving political objectives, the popular movement is stuck. Beijing is not negotiating and expects the protest movement to lose popular support as the HK economy slows and as its leadership make mistakes. Recent mistakes include frequent acts of vandalism to infrastructure.

The 7% jump in HK shares over December helped by the tentative Sino-US trade deal saw the index return a respectable 9.1% over 2019 – quite a feat given local issues which have delivered a recession.

Among HK blue chips there was significant performance dispersion, Ten Cent rose 20%, Ping An Insurance jumped 32.8% whilst more local stocks fell, HSBC ended down 6.3%, Swire Pacific lost 12.4% and Sino Land dropped 15.7%. The Hang Seng ended 2019 on just 11.4x reported earnings v 12.2x for the Shanghai Composite, which jumped 22% over 2019. Shanghai was helped by the fact that global index compiler MSCI lifted the weighting of Chinese A shares in the MSCI benchmark indices on three occasions.

The Eurostoxx index added c.25% in capital terms over 2019 “climbing a wall of worry”.

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France, marred by social unrest, the “gilet jaunes” demonstrations and the sight of Notre Dame in flames in April saw the blue chip CAC 40 gain 26%.

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The Athens General Index of Greece’s 60 biggest companies rose 50% to 916 points in 2019 as investors bought Greek stocks post the July election of a new right wing government. The market is below half of its 2010 level when Greece negotiated its first bail-out with the troika of EC, IMF and ECB.

Broad gains of 29% for US blue chips over 2019 are partly explained by high flying techs (Apple +84%, Nasdaq +35%) and 3 rate cuts from the Federal Reserve. When 2019 started investors believed Jerome Powell’s rate normalization plan would at best leave Federal Funds rates alone.

Whilst US stocks are dear at current valuations (P/E 24.2x), offering a paltry 1.8% dividend yield, US investors fired up by a strong US economy/ US consumer are looking past the longer term challenges posed by a $1trn p.a. budget deficit and high consumer debt. According to AB Bernstein US debt is running at c. 100% of GDP (combining federal, state and local government debt)

Looking to the November 2020 Presidential election we are struggling to see the Democratic front line presenting a credible challenge. Donald Trump will likely make further tax cut promises (that the US can ill afford). As an incumbent election we expect Democratic candidates will struggle.

At the dawn of a new decade, the world is moving towards de-carbonisation and lower demand for fossil fuels – an issue likely to pose challenges for the US petroleum industry and oil service supporting infrastructure. “Peak Oil” the expected peak in daily oil demand is expected in 2025. From then on oil could have a brief plateau period before reducing gradually.