Last week saw a reversal of fortune regarding market performance as global equities shrugged off concerns with MSCI AWCI rising +4.6% in GBP terms. This was primarily driven by the Chinese and US stock markets (up +6.5% and +5.1% respectively) and rests on the assumption that the Coronavirus outbreak can be contained. A secondary-order assumption stemming from the Coronavirus outbreak is that any economic slowdown will be countered with easier monetary policy from the world’s central banks, namely the People’s Bank of China and the Federal Reserve in the US.
This reversal in sentiment was also observed in the fixed income markets; high yield bonds rallied +0.60% while high quality bonds lost -0.12% – both in GBP hedged terms.
While the assumption that central banks will provide ever-increasing degrees of monetary stimulus to calm nervous markets has worked well as an investment strategy since the financial crisis, signs are appearing that this relationship could come to an end. Negative interest rates are being used in an attempt to stimulate growth in the Eurozone, Japan, Denmark, Switzerland and Hungary. Thus far the success of this experiment has left much to be desired, and the efficacy of negative rates is now being called into question by many. In December 2019, the Swedish central bank, the Riksbank, decided to abandon the negative interest rate experiment and raised rates to 0%.
The ineffectiveness of monetary policy to bolster further economic growth has led many market participants advocating a pivot to fiscal policy to pick up the slack. Governments in the UK and Europe seem to be gradually moving to take advantage of low interest rates for infrastructure spending. In addition, left wing economic policy is coming more into fashion around the globe, Bernie Sanders is leading the polls in the democratic primaries and over the weekend the Irish electorate returned Sinn Fein as the largest party in a general election. We continue closely to monitor policy makers preferences for economic stimulus and how markets will react.
