Market Insights – 2nd December 2019

Each week, a team of experts shares its market views with you.

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Essentials

China’s Caixin manufacturing PMI unexpectedly rose to 51.8 in November, beating the forecast decline. This indicator is now at its highest level since December 2016.

Walter-Borjans and Esken won the vote to lead Germany’s Social Democratic Party. This leadership choice could trigger further political uncertainty in the coming weeks, since it poses a threat to the country’s ruling coalition and its zero-deficit rule.

Black Friday seems to have lost some of its appeal in the USA, with scenes of frenzied shoppers becoming increasingly rare. Consumers have turned to the internet instead, with online purchases expected to reach USD 7.4 billion for Friday alone. This represents a 16% increase on last year.

To think some people had forecast a recession!

Exactly a year ago, Wall Street was caught in a downward spiral, taking all of the world’s stock markets with it. It was the start of the worst December in the US stock market’s history. The selloff was sparked by a sudden escalation in US-China trade tensions, with new customs tariffs brought in on both sides.

In this context many economists and strategists were predicting that the economic cycle would come to an end in 2019 with the USA and the world dropping into recession. This was never our forecast, as we were convinced that the Federal Reserve and other central banks had enough leeway to loosen their monetary policies in the absence of any signs of inflation. We also expected the political tensions between the world’s two superpowers to ease. A year later, and events seem to support our constructive scenario. It looks likely that US-China relations will improve. US growth has beaten analysts’ pessimistic expectations and stayed at a very respectable level, with GDP rising at an annualised rate of 2.1% in Q3. These same analysts were still getting over the surprises in Q1 and Q2, when annualised growth came in at 3.1% and 2% respectively.

This resilience is mainly due to firm consumer spending, spurred by high consumer confidence, rock-bottom unemployment and rising wages. The manufacturing sector, however, was hit by the chill in global trade. But since that sector now accounts for only around 20% of US GDP, its slowdown has had less of an impact than it used to. A number of indicators suggest that manufacturing output is stabilising or even picking up. It is our belief that most economists and investors still don’t agree with the Fed that 2019 was just a mid-cycle slowdown. But they may soon become convinced that the longest cycle in US history is not about to end. If that happens, Wall Street and other stock markets around the world could hold up well in the months to come. But after several weeks of uninterrupted gains, the US market seems somewhat overbought and a brief consolidation might be on the cards.

New peaks on the Swiss market

The SPI is at an all-time high and is poised to end the year up 30%. This outstanding performance comes as both domestic and global output seems to be stabilising or even rising slightly.

But if we take a closer look, Swiss equities have been lagging behind since the end of August and underperforming global stock-market indexes. Domestic stocks are struggling because of the brightening economic climate. Each time volatility has dropped this year, Swiss stocks have faltered. That’s because when investors are more confident, they move into riskier stocks and markets that offer more upside in the event of an economic recovery.

The fact that Swiss indexes are dominated by a handful of mainly defensive blue chips has weighed on their relative performance. But investors in Switzerland’s smallest caps, most of which are cyclical, have reaped the benefits in recent months. After 12 tough months, small caps have made a comeback and are catching up on the market heavyweights.

If the global economy continues to pick up in 2020 and geopolitical tensions ease, the Swiss market may struggle to outperform its peers, although this doesn’t mean it won’t reach new record highs.

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