Coronavirus: China GDP Growth Slowest in 30 Years
The most discussed current event around the globe at the minute is the looming fear of the spread of the coronavirus to anywhere further than China. President Xi Jinping and his government have been faced with one of the most time sensitive struggles since the spread of SARS in 2003 – containing a very contagious unknown virus in the most populated country in the world, whilst maintaining the second largest economy in the world.
As a result, most analysts have downgraded the growth rate of China for the year ahead. In a Reuters poll a fortnight ago, 40 Asian economists revised the projected growth for the first quarter from 6% down to 4.5%. The fear behind the virus is not only its lethal impact, but that as time goes on, the amount of re-allocated time and resources needed to tackle and contain the virus is all breaking down the projected growth for the year.
As most of China has been under quarantine, business and industrial operational conduct has taken a massive hit on the country’s overall productivity, as many companies have either not been able to pay their workers or had to spend more time pushing employees through quarantine procedure. Furthermore, whilst manufacturers are slowly beginning to bring some workers back in a hope to re-ignite some productivity, areas of China which have amounted to 80% of Chinas GDP and 90% of total exports have been shut down for far too long already.
Bank of England Base Rate Cut
The last time the Bank of England (BoE) met to discuss the current base rate of 0.75%, there was a hint of uncertainty in the air, as the months preceding the decision were at very least, politically volatile. Additionally, inflation rates leading up to the decision indicated that a base rate cut would possibly be due, as a lower inflation rate incentivises a base rate cut in order to lower borrowing costs and encourage spending.
The impact of this is that it highlights to the public, a certain level of confidence that the BoE have in the current and forecasted economy. If the base rate were to be adjusted, the financially mindful public would be able to deduce that economists have a certain level of confidence in the level of consumer expenditure. As the base rate remains at 0.75%, the BoE have outlined that a change does not need to be made at this time for consumer expenditure to play its part in driving the domestic economy.
Whilst the already low base rate has provided no favours to public savings since it was set, just after the financial crisis, the low base rate has slashed the costs of mortgages and made them much more attractive. In addition to nearly record high house prices, the combination of the two factors could be a catalyst for a strong year for UK property.
Post – Brexit trade negotiations
The UK officially left the European Union on 31st January 2020 after years of political uncertainty following the Brexit vote in 2016. The UK has now entered an eleven-month transition period during which, the UK and the EU must try and come to a trade agreement and establish a new relationship.
The transition period is designed to give businesses enough time to prepare and to allow for both the EU and UK to come to an agreement whilst still trading normally. During the transition period, the UK must abide by EU trading regulations and so continue to trade on the single market and the customs union.
To put into context how important trade is for the UK, in 2018 alone, the total value of UK trade was £1.3 trillion and almost half of this was with the EU. Trade of goods and services between the UK and other countries is central to the UK’s economy and is of significant importance in supporting millions of jobs across the country.
Boris Johnson has already stated that he wishes to secure a free trade deal but without agreeing to match all EU social and environmental regulations. The UK has previously been warned several times that they cannot expect to benefit from a continued ‘high-quality’ market access without adhering to EU standards. Because of this, critics of the UK government have been pessimistic on the time frame Johnson has allowed for these agreements, especially when considering the complex economy of the UK. Additionally, France has warned the UK to expect a ‘bruising battle’ in the upcoming months, although both sides have said they want no tariffs or quotas which may simplify matters.
Positive 2020 Outlook for Emerging Markets
After an uninspiring performance in 2019, the market outlook for Emerging Markets moving into 2020 includes predictions of increased GDP growth and general improvement of investor sentiment. The new positive outlook on emerging markets is due to past under-performance, the prediction of the US Dollar weakening and further positive negotiating between China and the US.
Over the last two years, Emerging Markets have shown continuously mediocre performance, even compared to UK markets. This performance has permitted Emerging markets to become ‘unloved’ as companies in Emerging and Frontier markets are currently sat incredibly undervalued. This presents an attractive opportunity for growth that cannot be matched by those companies in developed countries. JPMorgan have become overweight in their Emerging Markets exposure through reducing their investment in the US, due to this analysis, in the hopes that they can purchase these undervalued stocks before they grow exponentially.
The future of emerging markets, unfortunately, does hang in the balance of wider global macro-economic events. There is strong possibility for the US dollar to weaken over the next 12- months as analysts on Wall Street predict a decline of between 3% and 5%. We saw the dollar begin to slide in Quarter four of 2019, and it is expected to decline further moving towards the re-election if there is an increase in uncertainty and a candidate poses a threat to businesses. The dollar is currently expensive and has a strong negative correlation with Emerging Markets, meaning as the dollar slides, Emerging Markets begin to rise.
Additionally, the ongoing negotiations between the US and China regarding trade talks, suggest that both countries are looking to avoid further escalation of the trade war. Global growth has slowed as a result of the tensions between US and China and it is now in their interest to avoid further global slowdown, especially for Trump as he enters election year. However, as the US are now focussed on Iran, trade talks with China may be delayed.
Higher volatility is also to be expected from Emerging markets during 2020, mostly due to elections taking place in Taiwan, Singapore, Korea and the US. The combination of the results from these elections will echo throughout emerging markets and go some way in determining growth in individual countries.
In conclusion, Emerging Markets have an enhanced outlook for 2020 and may well benefit from global events discussed. Nevertheless, performance on the whole over recent years has been disappointing and isn’t expected to rise dramatically.
Coronavirus capable of pushing Japan to recession
Recently released official figures show that Japan has suffered its worst quarter since 2014. The GDP declined 1.6% in the final quarter of 2019. Annualised, this is equivalent to a 6.3% slump in GDP. This is well below analysts’ previous expectations of a 3.7% decline. Forecasters have now cut predictions for the first quarter of 2020 on the back of this data and in anticipation of a further contraction. If this further reduction in GDP does occur, then Japan is facing a technical recession, defined as two straight periods of quarterly contraction. Taro Saito, executive research fellow at NLI Research Institute, said: "There's a pretty good chance the economy will suffer another contraction in January-March.”
Japan is the world’s third biggest economy and is due to host the 2020 Olympics this summer. The sharp contraction of Japans output has been blamed on the sales tax knocking both business and consumer spending. There has also been a major typhoon in Japan which has hit all spending in the country.
The Coronavirus has now spread from mainland China and analysts are stating that the outbreak could take a further toll on growth. The virus will predominantly damage exports and inbound tourism, but domestic consumption could also be negatively impacted. Furthermore, if the epidemic is not contained by the time of the Tokyo Olympic Games, the damage to the economy will be huge as Japan will be relying heavily on the money this will bring to the country. Credit ratings agency Moody’s have said that the impact of the coronavirus on Japan’s economy will be widely felt, and not just in major trading partners such as Germany.
UK Consumer Confidence at highest level since 2009
With the future of the country looking clearer and with at least some of the uncertainty surrounding the UK now gone. Household’s confidence is at a 10-year high and a ‘Boris bounce’ can be seen in many areas according to a survey by IHS Markit.
The survey only represents optimism for the country’s immediate economic future off the back of factors such as the election result. However, the increased consumer optimism and spending as a result of these factors is likely to boost the economy and keep it in a healthy state going into Quarters 2 & 3, even after the initial hype surrounding factors such as the ‘Boris Bounce’ subsides. This optimism aligns with Reeves more positive 2020 outlook, shown by an increase in UK equities across all risk categories, which will undoubtably benefit from the boost to consumer confidence.
Not only would increased consumer spending bode well for the economy as a whole, it would also be welcomed by a retail sector which has suffered more than most over the past few years. Although property funds have explored alternative allocations to retail in recent years with the decline of the high street being well documented, many still maintain some kind of exposure for this very reason. Reeves hold both BMO UK Property 2 and Threadneedle UK Property which both have exposure to retail, with the latter holding a significant 17% allocation. In keeping with the theme of property, UK households outlook towards house prices is also the most optimistic in years.
How long this optimism surrounding the economy lasts seemingly depends on what type of trade deals can be agreed before the December deadline.
Rising house prices post-Boris Bounce
There’s a consensus between commentators and market analysts that 2020 will be a better year for UK house price growth, with the main driver of this being the ‘Boris Bounce’ after the election result. According to ONS figures, the early signs of this can be seen by house prices increasing annually across all regions in December for the first time since February 2018,
However, will this optimism remain after the Boris Bounce has been and gone, or is this merely a blip in an otherwise disappointing trend over the past few years? Although this can only be answered accurately in a few months’ time, there are reasons to be optimistic. Reasons behind low demand from buyers was the uncertainty that surrounded the future of the country. Now that at least some of this is cleared up, there is less reason for potential buyers to postpone buying. Many have remained cautious in their predictions for the growth rate, with most outlooks ranging from around 1-3%, however the main message is that almost all predictions can see an improvement on the last few years figures.
Reeves clients can benefit from this through the TM Home investor fund, which is held in all three risk categories, with the main strategy of the fund being to capture UK house price growth.
Overall, caution is still advised as the full impact and future of Brexit is still unknown as well as the chance of housing reforms being included in the March budget announcement. However, so far there have been positive signs in the housing market and there is an expectation for this to continue.
Sources: Information is included in this article has been obtained from a range of sources including seminars, webinars, industry publications and general media comments.
- Bloomberg - (4th February, China’s Economy Seen Growing Slowest Since 1990 Due to Virus)
- The Telegraph - (3rd February, Global growth forecasts slashed as China's coronavirus spreads through the world economy)
- BBC News - (30th January, UK interest rates held as economy shows signs of picking up)
- BBC News - (17th February, France warns UK of bitter trade negotiations)
- GOV – (10th February, The UK has left the EU)
- The Guardian – (17th February, Coronavirus could push Japan into recession)
- Reuters – (17th February, Japan on brink of recession as economy contracts - virus heightens risk)
- The Guardian – (17th February, UK consumer confidence at highest level since 2009)
- Yahoo Finance – (19th February, House prices increase across whole of UK for first time in nearly two years)
- The Guardian – (1st February, Brexit day one: Johnson goes for broke with hardline trade deal)
- Estate Agent Today – (16th January, Boris Bounce: two more signs of an improving market at last)
Disclaimer: This document represents the opinion of Reeves Independent only and is not intended as advice and no investment decisions should be made solely on the back of this email. Always seek independent financial advice before taking any action. Past performance is not a guide to future performance. All investments carry the risk that you will get back less than you put in.