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The political risks which influenced global equity markets for much of 2019 were dialled down in the fourth quarter, meaning that global equities saw a solid end to the year.  US, Asian and Emerging Market equities made gains in local currency terms, following the announcement that the US and China has reached a “phase one” trade deal.

Eurozone shares advanced, supported by signs of better economic data from Germany as well as the US deciding against applying tariffs to certain imports from the EU, such as vehicles.

UK shares recovered from their slump over the summer and subdued autumn, following the landslide general election victory for the Conservative Party. In particular, the FTSE 250 and domestically focused areas of the market performed well. This was of benefit to our carefully selected UK fund choices, especially our allocation to a UK Mid Cap fund, which returned 11.4% over the quarter and 33.7% for the full year, a very positive result after the fund saw volatility in 2018.

Japanese shares made strong gains in Sterling terms over 2019. Economic data for the country continued to show a significant difference between the strength in service sectors and the weakness in manufacturing. Our Japanese Equity fund choice for model portfolios is skewed towards service companies and domestic businesses and made a solid return of 24% over the year, in excess of the 14% achieved by the Nikkei 225 index and erasing previous losses.

Sterling strengthened against the Dollar and the Euro over the quarter, as the Brexit date became clear following the General Election. This meant that although US, European and Asian markets were strong, Sterling based investors in these markets achieved more modest gains. This is because once returns were translated into Sterling, less Pounds were received per unit of overseas currency.

We acknowledge the strength of equities in the fourth quarter of 2019 but are not complacent. Politics are likely to influence equities once again in 2020 and we continue to scrutinise economic data for any signs of a slowdown in growth in the regions and countries where our portfolios are invested. Geopolitical tensions between the US and Iran drove the oil price to over $70 a barrel on 6 January 2020, amid concerns that tensions in the region will impact supply. Further increases could be a headwind to equity markets in general. Other salient political factors in the coming year include ongoing trade talks between the US and China, with difficult negotiations over issues such as intellectual property and technology ahead, and the path that UK-EU trade deal negotiations take.

We also continue to monitor bond markets and our bond fund selections. In the last quarter of 2019 developed government bond markets saw rising yields in general, meaning that prices fell, whilst returns from good quality Sterling corporate bonds (“investment grade”) were flat, reflecting a more “risk on” environment as political risks receded. Exchange rates will continue to influence the returns achieved by bonds, which is why we ensure the bond funds in our portfolio are primarily hedged to Sterling.

This article is for information purposes only. It does not constitute investment advice and is not a recommendation to invest. The value of investments and the income from them may go down as well as up and you may not get back your original investment.

Date of publication: 10 January 2020

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