The roaring twenties . . . and fresh US-Iran tensions
AFTER just one full week back after the festive season a great deal seems to have happened already in 2020. The sudden escalation in tensions between Iran and the US has dominated the headlines over the past few days and led to sharp swings in both the oil price and the price of gold.
The equity markets, however, have been fairly resilient, emphasising the importance of waiting out such short-term situations and focussing on the fundamental economic factors which drive markets on a long-term basis: economic growth and corporate profits. Indeed, such volatility often provides opportunities for long term investors.
In the UK so far, the signs are much more promising in terms of political stability: with the large Conservative majority in Westminster it is unlikely that we will see the scramble for votes in order to move forward.
Closer to home, in Northern Ireland, the return of Stormont after three years is a very welcome move. Having dominated domestic political headlines for so long, it is notable that Brexit is no longer front and centre stage and there is a real feeling that it is back to business as usual.
In the US we have the presidential election to look forward to later this year and with President Trump seemingly backing away from a military confrontation with Iran, equity investors will hope that stability (particularly with regard to the oil price) will be a priority.
After such a lengthy bull market it is inevitable that there will be speculation as to how long it can continue. The key questions for the year ahead are whether central banks have laid the ground for an extended economic cycle and whether corporate earnings will rebound to ease pressure on margins. It is likely to be a few months before the answer to this becomes apparent.
However, it is clear that owning equities is still appealing, given the limited upside from holding expensive bonds which provide very meagre fixed rates of interest. Thus, even with the inevitable market volatility, equity market dips seem likely to attract buyers over the coming months.
It is also apparent that stocks will not move in tandem: we have already seen the mixed trading figures for the retail sector – an area that is undergoing fundamental structural change, emphasised by the demise of former bastions of the high street such as Mothercare and the promise of multiple store closures from a number of long-established retail groups.
In contrast, stocks which had been firmly out of favour with the threat of a Labour government and renationalisation, such as utilities, have seen a welcome bounce in recent weeks.
The year promises to be an eventful one, but the underlying message should be the same: although political developments do impact shorter term, the ultimate arbiter of how equities and credit fare in 2020 is dependent on valuations being supported by stronger economic data and earnings.
:: Cathy Dixon is a partner at the Belfast office of Cunningham Coates Stockbrokers. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.