Buoyant times, but cautious optimism called for
Good riddance to the twenty-teenies – bring on the roaring twenties! Such has been the theme of much market commentary as pundits shake off the miseries of the recent past and look ahead to the New Year.
Leave behind the miseries we have endured through the stagnation of recent years. Buoyant times beckon for housebuilding companies, infrastructure groups and utilities as the new Conservative administration stresses its determination to press ahead with regeneration and transformative transport uplift and renewal.
The crushing victory over Corbyn economics – higher tax, renationalisation and a further extension of the state into ever more areas of economic life – has fuelled a massive relief rally in the stock market. Billions of global investment funds have flooded back into the UK as Brexit woes have been banished.
It’s a comforting summary of where we are at. But was 2019 really such a bad year for the UK stock market? And are the sunlit pundit summations for 2020 really so cloudless?
Over the course of 2019, the FTSE100 index has had a good year by historic standards, gaining 13.3 per cent to 7,644.90. Admittedly, this owed much to the last-minute ‘Boris Bounce’ since the 12 December general election: since December 11 the index has gained 428 points or six per cent.
Even more startling has been the performance of the FTSE250 Index of midsize UK companies more exposed to the travails of the domestic economy. It has gained 6.8 per cent since 11 December , taking its rise since the depths of early January to a stunning 26.5 per cent.
But seldom has a market gain of this magnitude been accompanied by such earnest hand-wringing and doom-laden pessimism. Spectacular casualties there have certainly been. High street retailers, fashion outlets and restaurants have experienced a wave of closures and cutbacks. This saw the disappearance from town centres of names such as Thomas Cook, LK Bennett, Karen Millen and Oddbins.
The year has also seen the demise of the star fund manager, with the crisis that engulfed Neil Woodford and the hundreds of thousands of investors trapped in his Equity Income fund. Its over-concentration in small, difficult-totrade AIM stocks and unquoteds suffered a collapse in fortunes. Other Woodford funds were hit, as was the £1.1 billion Edinburgh Investment Trust where manager Mark Barnett was replaced after a lengthy period of under-performance.
Other victims included open-ended property funds with the high-profile M&G Property fund where withdrawals were frozen. Other unit trust property funds have suffered outflows and a slump in investor confidence.
Hopes are now pinned on a further extension of the market rally – investment group Schroders estimates that UK equities have been trading at a 30 per cent discount to global peers.
A construction sector boom now beckons with the Conservative pledge to ‘deliver’ a million more homes over the next five years, and a phalanx of regeneration and infrastructure projects for the north of England.
However, without wishing to spoil the party, some notes of caution are in order. First, it is not unreasonable to expect that after such a sharp bounce in recent weeks, the UK market may be in line for a period of profit-taking – “consolidation” in polite parlance – before a distinctive new trend emerges.
Bear in mind that the performance of UK equities has been helped in large measure by lower for longer’ interest rates and loose monetary policy that have worked to stretch valuations above historical norms.
Second, the rally in the pound since December 12 will have clipped the investment attractions of leading UK equities, making them more expensive for international investors, while dimming our export competitiveness. It may also weaken the appetites of private equity investors who have taken advantage of the UK’S relatively cheap ratings through acquisitions.
And third, this promised new wave of government infrastructure spending will not only take time to bear fruit but its beneficial impact may be overstated. Some £12 billion was spent on a transformative computer programme for the NHS in the early 2000s which failed to deliver on the mooted benefits for patients. There are also legions of examples where transport upgrades have wildly overshot their original cost estimates, while other projects have failed to deliver a promised uplift in productivity. The structural problems of the north-east and north-west of England run deep, chief among them an ageing population and one lagging in digital and ‘new economy’skills.civic amenitiesmayimprove a sense of well-being but cannot be counted on to deliver transformative economic uplift.
This is not an argument for steering clear of UK equities in 2020. Rather, it is a warning shot against runaway optimism –“irrational exuberance” in the classic phrase of former US Fed chairman Alan Greenspan. The year ahead could well be one where unloved value stocks and trusts come back into vogue.
There are many long-standing and broadbased trusts from which to choose – Baillie Giffordukgrowth, Independentinvestment Trust and JP Morgan Mid-cap among them. Global trusts should not be overlooked, with long-overlooked Japan tipped to perform better than most in 2020.
Good luck in the ‘roaring twenties’!