Just over a year ago , in the final quarter of 2018, we were witnessing  a synchronised slowdown in global growth and a current downturnin equity markets, which meant investors were entering 2019 in a downbeat mood. Nevertheless, we still expected that equities would outperformcash and bonds over the year, due to attractive equity valuations and a US President determined to boost the US economy.
Happily, this was the case. It has been a bumpy ride in some markets but the UK’s FTSE 100 ended the year up by 12%, while the FTSE250 had a particularly good year, up by 25%. The US market continued to hot record highs – its S&P 500 index rose by 29% – while China’sShanghai Composite Index rose by 22%, even as its economy slowed and the trade war hit its exports.
Despite strong returns from equity markets, 2019 was a mixed bag  in terms of economic growth with a manufacturing slowdown weighingon growth in the US and more severely in Germany and China. The year ended, however, with signs of life returning to that part of the market, which we expect to gather pace as 2020 progresses.
Geopolitical tensionsPerhaps the most important factor of the year ahead is the possible resolution of the trade dispute between the US and China. Markets reactedenthusiastically to news in December that a partial trade deal had been struck, although it has yet to be signed. If completed, it will be good newsfor the global economy as it reduces uncertainty and should boost investment and hiring. But we should not get carried away with the hopes thata “phase two” deal will be struck this year, as there are still significant hurdles to overcome. One tough issue is Chinese subsidies. As part of its Made in China 2025 plan, Beijing aims to use government subsidies to help Chinese companies  buy intellectual property that will give them an edgeagainst Western competitors , particularly in fields such as 5G. The US wants these eliminated.
Even the schedule for the “phase two” talks is uncertain. America says negotiations will begin immediately , but China may want to wait until after the US elections in November, when there may be a more amenable incumbent in the White House. However that does not mean progress cannotbe made. Our base case view remains that the trade war between the US and China will not escalate to the extent that it results in a serious growth downturn , and President Trump will want the US economy to be in good shape to boost his chances of re-election in November.
But just as it seemed that progress was being made on the trade war, President Trump has created another geo-political flashpoint by orderingthe airstrike that killed one of Iran’s most senior military leaders. The obvious concern is that it may escalate into a conflict that could drag in othercountries and involve some of the world’s biggest oil producers. It is a situation that will need close monitoring as it develops during 2020.
In summaryThere are enough positives at the start of 2020 for equities to outperform bonds and cash once more. While some notable risks remain, we are alert to the opportunities and challenges that these present. That is why we manage diversified portfolios of asset classes and geographical regions which can capture the opportunities that are thrown up by any market corrections or price shifts in particular assets, creating selective buying opportunities for our clients.
Following such a strong year in 2019 we have to be realistic about the prospects for 2020 but that doesn’t mean being pessimistic. As legendary investorPeter Lynch pointed out:
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections,than has been lost in corrections themselves.”