Views on the News

20 January 2020

4 minute read

A weekly round-up of the leading business, personal finance, investment, savings and pensions stories in the press from the past week, including analysis and opinion from our experts.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • UK retail sales extend their worst ever run for decades
  • US and China sign trade deal, as China’s growth slows
  • Is this the worst time ever to invest?

UK retail sales extend their worst ever run for decades

Retail sales fell again in December as a Christmas shopping spree failed to materialise. Sales volumes fell by 0.6% from November, the fifth month in a row without growth, the Office for National Statistics said. It comes amid worries about economic growth and forecasts that the Bank of England could cut interest rates soon. Food stores were hard hit, with the quantity bought falling by the biggest amount since December 2016. The latest figures were published as UK high streets continue to face tough trading conditions, with big chains such as Mothercare and Thomas Cook going bust in recent months.1 The very weak sales chime with consumer credit numbers that show families holding off from hitting the plastic. It indicates a degree of caution among households, despite record levels of employment and healthy pay growth. Economists fear it will undermine GDP, as the strong consumer sector has kept growth on track for much of the past three years.2

Our view: The disappointment in retail sales growth was one out of a larger set of mixed economic data for the UK since Q4 2019. This has raised expectations of an imminent rate cut from the Bank of England to support growth. Such a move from the Bank of England has been almost fully priced in by investors. Despite the increased risk of lower interest rates, we maintain our view that UK long-term Gilts look expensive, with its risk/reward profile still unattractive versus other assets within a multi-asset portfolio (Hao Ran Wee, Investment Strategist).

US and China sign trade deal, as China’s growth slows

The US and China have signed an agreement aimed at easing a trade war that has rattled markets and weighed on the global economy. Speaking in Washington, US President Donald Trump said the pact would be "transformative" for the US economy. Chinese leaders called it a "win-win" deal that would help foster better relations between the two countries. China has pledged to boost US imports by $200bn above 2017 levels and strengthen intellectual property rules. In exchange, the US has agreed to halve some of the new tariffs it has imposed on Chinese products. However, the majority of the border taxes remain in place, which has prompted business groups to call for further talks.3 Meanwhile, China's economic growth slowed to its weakest in nearly 30 years in 2019 amid the bruising trade war with the US and sputtering investment. Fourth-quarter gross domestic product (GDP) rose 6% year-on-year, data from the National Bureau of Statistics showed. That left full-year growth at 6.1%, the slowest annual rate of expansion China has seen since 1990. Despite the trade war truce and expectations that the Chinese government will launch a stimulus programme, economists polled by Reuters expect growth will cool further this year to 5.9%.4

Our view: As China’s economy matures, its growth rate should trend structurally lower as well. Therefore, it should neither be surprising (nor too concerning) that growth has slowed to decade-level lows. Limited tariff relief from the Phase One trade deal, plus some stimulus from the government, may provide limited support to near-term growth. Ultimately however, sustainable long-run growth can only come through structural reforms that boost the Chinese economy’s productivity (Hao Ran Wee, Investment Strategist).

Is this the worst time ever to invest?

2019 saw the US share market enter its longest-running bull phase in history. If you judge company share prices in relation to the profits they make, then Wall Street stocks have only ever been this high in 1929 and 1999. No prizes for knowing what happened next. As for bonds, the UK government is £1.8tn in debt. Yet it is able to borrow for the next half century for just 1.21% per annum. If you choose to leave your money in the bank, inflation will erode its value in real terms. The good news? The UK stock market is now cheaper than at any time since the 1970s, if you compare it with other markets in developed countries. Donald Trump faces an election this year and is likely to keep the US stock market buoyant. The UK could also benefit if the promised end to austerity and infrastructure projects actually materialise. The truth about markets is that almost nobody gets timing right, and missing upturns is as risky as avoiding falls. The boring rules still apply – have a diversified spread of investments, hold for the long term, and avoid high charges eating your returns. And if you want a go at playing the markets, then maybe this is the year to buy British.5

Our view: We’ve repeatedly emphasised the dangers of relying on naive valuation metrics like the ones mentioned above to make investment decisions. Yes, higher stock market valuations tend to be followed by lower long-run returns on average. But such patterns only hold for long time horizons (we’re talking five years or more), and should have little bearing on one’s near term investment decisions. Furthermore, one key reason why the UK stock market is cheaper than the US is because UK companies are, on average, less profitable. A valuation gap between the UK and the US doesn't mean that an obvious investment opportunity exists here. Overall, the article’s ‘boring rules’ are still the most important for investors – long-term diversification and cheap investments. You could also argue that the costs of assembling and maintaining a diversified pool of investments relative to previous eras make today the best time ever to be an investor (Hao Ran Wee, Investment Strategist).

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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