Low interest rates weigh on investors

The two stories that dominated stock markets in recent months, the US-China trade war and Brexit, interestingly, did not weigh on stock markets.

Low interest rates weigh on investors

The two stories that dominated stock markets in recent months, the US-China trade war and Brexit, interestingly, did not weigh on stock markets.

Stocks were up strongly and the dollar and sterling both appreciated over the year. The annual gains for stock markets are, however, a bit misleading this time out because November and December 2018 saw big falls that went into reverse in January 2019. A better guide is the numbers covering the past 18 months.

For 2019, stock markets are showing significant gains but taken in context with the 2018 correction, gains are modest over a longer period. The surprise is gold with a healthy 15% return.

Heading into 2020, the two market stories will remain important. After the UK election, I thought Brexit would take a back seat while trade deals were negotiated.

However, Boris Johnson has re-inserted the threat of a crash-out Brexit if the trade deal deadline is not met — effectively consigning the UK economy to another year of uncertainty.

The bullying tactic did not work for the October 31 deadline and is unlikely to work this time, and I expect Mr Johnson to bumble along with populist agendas that never get completed, just like President Donald Trump in that regard.

All this means that the sterling rally and the pick-up in UK asset prices I had anticipated are now unlikely to happen. The no-deal threat may stall investment decisions in the UK and keep the euro against sterling at an artificially high level.

The big event in the US will be the election. Yes, President Trump is impeached but that is a political issue and not a market mover. Frankly, there is no chance of him being ousted so it will disappear as a stock market story soon.

President Trump will do everything in his power to get re-elected, including trying to influence the Federal Reserve to further lower interest rates and dampen the dollar — which are all good for stocks. There is a real prospect of four more years of President Trump and a Trump-Johnson buddy show. Promising to tax the big tech companies is likely to be on the 2020 political agenda. If that is the case, tech stock prices could be in for a tough year.

In Europe, there is a change of leadership at the ECB, with Christine Lagarde taking over from Mario Draghi.

However, ultra-low interest rates are set to continue for years to come.

In Ireland, we are still punching strong growth. Regardless of the outcome of Brexit trade talks, doing busing with Ireland will be far more attractive to our European partners than doing business with the UK.

Tax receipts are booming, and Finance Minister Paschal Donohoe will benefit from the lower cost of funding on the national debt. In 2020, €17bn of debt matures, which will be refinanced at borrowing costs of around 0.5%, meaning big savings. I hope they spend it wisely.

For investments and pensions, the big challenge again is low interest rates. For cautious investors, holding bonds which are designed to reduce risk, but carry no yield, likely means no returns. It is a time to look at risk profiles and asset allocations.

Investment in equities still looks good and emerging market bonds are also attractive. In Ireland, investing in social housing is proving attractive to depositors and a more proactive attitude to investing should be the strategy for 2020.

Peter Brown is founder of Baggot Investment Partners at pbrown@baggot.ie

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