A holiday gift for markets: Increased economic policy certainty

Weekly Market Compass: The UK election and US-China trade deal promise to provide more clarity for businesses next year

Dec 17, 2019 | Kristina Hooper






Two developments last week suggest that we have entered a period of improved economic policy certainty. Both the UK election and the US-China Phase 1 trade deal promise to bring far more clarity for businesses as they plan for 2020 and beyond. If so, this could be a welcome gift for the economy and the stock market as we enter the holiday season.

A Jan. 31 Brexit looks likely

Thanks to a Conservative Party landslide in the Dec. 12 UK Parliamentary election, we expect Brexit can be completed by the end of January, but trade negotiations on the future relationship of the UK and the European Union may be stretched out beyond December 2020. At this point, it looks possible that the UK may exit the EU’s single market (which allows for the free movement of goods and services among the different countries in the EU), but remain in or align with the customs union (which establishes a common system of tariffs and import quotas for trading with non-members).

As the details solidify, I would expect to see a gradual and sustained recovery in investment and a reversion to a higher growth rate that is somewhere between that of the eurozone and that of the US (even if it is slower than pre-Brexit economic growth). If so, sterling is likely to consolidate some further gains, but still at a discount to pre-Brexit levels. Gilt yields could move somewhat higher still. Equities are likely to rise significantly. With uncertainty easing, the Bank of England might even attempt to catch up to the global easing frenzy with a rate cut. 

A Phase 1 trade deal could provide significant benefits

The day after the UK election, it was announced that the US and China have agreed on the first phase of a trade deal — a development that I believe should be very positive for a number of industries.

This Phase 1 deal includes several items that could benefit US industries:

  • China has promised to ease pressure on US companies in terms of technology transfer, which should be very positive for the tech sector, if it comes to fruition.
  • The withdrawal of tariffs threatened to be imposed on Dec. 15 should also benefit US tech companies (laptops and cell phones would have been subject to those tariffs) as well as some US retailers (who would have had price increases on imported goods from China that they sell, from personal care products to clothing to household goods).
  • The agriculture, energy, and manufacturing industries should also benefit – if China does in fact purchase additional goods, as is currently part of the Phase 1 deal.
  • The partial rollback of the September tariffs (from 15% to 7.5%) are also part of the current deal. That should benefit US retailers, given those tariffs were focused on consumer goods.

Going forward, the rollback of additional existing tariffs over time is expected as well — although this is far from certain. If these rollbacks were to occur, one likely beneficiary is the auto industry (US and German auto companies).

Overall, the Phase 1 deal should be positive for business investment because it reduces economic policy uncertainty, and increased business investment should benefit the global economy. I expect this to create an upward bias for stocks globally — especially for Chinese equities, which in my view have been unfairly beaten down in the last several years.

Neither development is a ‘done deal’

While increased certainty around Brexit and a Phase 1 US-China trade deal are both very positive developments, nothing is a “done deal.”

  • There remains some uncertainty on the approach UK Prime Minister Boris Johnson will take going forward. Commentary over the weekend was divided on whether or not Johnson will soften his Brexit stance. Some argue he will because he is no longer beholden to the ERG (an alliance of pro-Brexit Conservative Members of Parliament) and Nigel Farage (leader of the Brexit Party). On the other hand, others argue he will want to stick to his promise of ending the transition period by the end of 2020).
  • The Phase 1 deal has not been signed, and there is still a possibility that the agreement in principle could be derailed:
  1. China has thus far only confirmed a few details of the agreement — that it will increase its purchases of US goods but does not appear willing to meet specific quotas. It has not confirmed that it will ease technology transfer requirements that US companies have been subject to.
  2. China is laser focused on getting the US to continue to roll back existing tariffs — and has made that an important condition of negotiations. However, the US has thus far been very reluctant to roll back tariffs without gaining any major concessions, so it is unclear whether it will give up any more ground than it already has.
  3. While the US and China have come to a truce on tariffs, they appear to be engaged in other skirmishes. Last week, the Financial Times reported that China has ordered its government offices to remove foreign computer equipment and software within three years, replacing it with Chinese equipment and software. This would negatively impact US tech companies that supply such goods to China. This appears to be in retaliation for a recent directive by the Trump administration to curb the use of Chinese technology by the US. Large-scale replacement of US equipment by China is expected to begin next year, suggesting the relationship between the two countries remains tense and there is a real risk that it could deteriorate and possibly negatively impact trade negotiations.

In conclusion, last week’s developments are very positive. However, until Brexit is completed and a Phase 1 trade deal is signed, there is the potential that uncertainty could spike again. In our view, this means that while maintaining a diversified portfolio with adequate exposure to risk assets is important, it’s also critical to plan for the potential for higher volatility in the short term.

Happy holidays

In celebration of the holiday season, Weekly Market Compass will not publish for the last two weeks of the year. We’ll be back on Jan. 6. Happy Holidays to you and yours!

Kristina Hooper is Chief Global Market Strategist at Invesco.

Related articles

Important information

The opinions referenced above are those of Kristina Hooper as of December 16, 2019.

This document has been prepared only for those persons to whom Invesco has provided it for informational purposes only. This document is not an offering of a financial product and is not intended for and should not be distributed to retail clients who are resident in jurisdiction where its distribution is not authorized or is unlawful. Circulation, disclosure, or dissemination of all or any part of this document to any person without the consent of Invesco is prohibited.

This document may contain statements that are not purely historical in nature but are "forward-looking statements", which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Invesco does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.

The information in this document has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs. Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.

You should note that this information:
•    may contain references to amounts which are not in local currencies;
•    may contain financial information which is not prepared in accordance with the laws or practices of your country of residence;
•    may not address risks associated with investment in foreign currency denominated investments; and
•    does not address local tax issues.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Investment involves risk. Please review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

The distribution and offering of this document in certain jurisdictions may be restricted by law. Persons into whose possession this marketing material may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.