2019: Fourth Quarter Year End Wrap

Starting with the U.S. – The Goldilocks Year…

Our 2018 year-end macro wrap hinted at the U.S. entering a “Goldilocks period for equities” i.e. an environment of low inflation and low interest rates. U.S. equities did not disappoint – if anything, 2019 was a year of stellar performance. Consumers account for 70% of U.S. GDP and were the key driver for the economy in 2019.

The U.S. unemployment rate is at a 50-year low of 3.5% with wages up  3.1% from last year. The index of aggregate weekly payrolls (a good proxy for household income) rose 4.8% in the last year. The November U.S. jobs report showed the economy added 266,000 new non-farm jobs (economists expected this number to be at 180,000). The recently released strong labour market data along with inflation near the 2% (low gas and stable food prices) objective supported the Federal Reserve to leave key interest rates unchanged between 1.5% and 1.75%.

The only negative news is the ISM Manufacturing index which went down in November to 48.1 (fourth month in a row below 50) thereby indicating a slowdown. This is attributed largely to risks associated with the U.S. China trade tiff. The Trump administration cancelled new tariffs on another $160bn worth of Chinese goods scheduled for December 15. The U.S. also plans to reduce the 15% tariff on $120 billion worth of Chinese imports down to 7.5%. The 25% tariff on $250 billion worth of Chinese goods remains in place for now, and will likely be used as leverage in future negotiations with China. We hope that the US-China trade spat should be less of an issue for 2020.

The S&P 500 touched all-time highs in 2019. As per FactSet, the S&P 500’s earnings are expected to decline by 1.3% in the fourth quarter and revenue is forecast to grow by 2.5%. However, there is also a prevailing belief that the U.S. economy is not going to enter a recession anytime soon. Rather, the notion of a pick-up in GDP in the first quarter of 2020 is rising.

Moving on to Europe:  Is Brexit finally behind us?

Prime Minister Boris Johnson had a landslide victory which gave his Tory party a big majority with 365 seats in Parliament – Brexit will likely happen on January 31, 2020. We were negative on the British pound, but now expect it to enter into a phase of strengthening. Britain is one of the few economies in Europe which still has positive interest rates, so capital should flow for higher yield (and hence a stronger currency). From an EU perspective, there is concern that Britain could become a trading hub for the EU where multinational companies can gain access to the huge EU market without EU rules. French President Emmanuel Macron has stated that Britain could become a formidable rival and unfair competitor, while German Chancellor Angela Merkel considers Britain to be an economic “competitor at our door” after it leaves the EU.

The Eurozone struggles remain the same as at the beginning of 2019. Uncertainties in global trade conflicts have resulted in corporates unwillingness to invest – a key negative for an export-oriented continent. Going forward, private consumption will play a key role in preventing this slowdown from becoming a recession. There is positive news for private consumption with unemployment falling to 7.4% in September 2019 from 9.5% in 2017.

China: The need for a trade deal with the U.S.

The Chinese economy which had previously shown negative manufacturing PMI reversed the trend and reported a manufacturing PMI of 50.2 in both November and December – above analyst estimates. Non-manufacturing PMI was at 53.5 in December (below analyst expectations of 54.2). Combined profits at industrial enterprises rose 5.4% in November, a sharp rebound from a year on year drop of 9.9% in October. The key negative was the pressure on the Chinese yuan and the African swine fever. China’s National Bureau of Statistics reported that consumer prices soared to an annual rate of 4.5% due to rising pork prices.

Notwithstanding public posturing, China is hurting and needs the U.S. The above should (and has) improved trade negotiations between the U.S. and China. Notwithstanding the recent positive steps, there is little evidence that China will change its long-term behaviour. The tariffs on Chinese and U.S. imports may well be for the long term.

Closer home in India: The year of consolidation

2019 was a year of consolidation and painful transition for the Indian economy. While headline indices put on a resilient show with the Nifty 50 closing at 12,168 and Sensex closing at 41,253 , the broader markets and the economy saw lacklustre performance burdened by the transition. The Indian economy slowed significantly and sharply to 4.5% (GDP growth of Q2FY20), contrary to consensus expectations. The negative surprise was driven by both global and domestic factors. Stress in the non-bank sector intensified, and despite several measures to lift sentiment and ease infrastructure bottlenecks, consumption and private sector capex saw weakness through the year.

The fall in GDP growth has largely been on account of falling investment and lacklustre exports. While consumption has remained a strong driver, the last 2 quarters gradual fall in consumption is now raising alarm bells for policymakers. Erratic monsoons further exasperated rural consumption as crops were damaged by incessant rains and flooding across the food belt.

RBI had been bringing down the repo rate till end 2019.  In a surprise move in Dec 2019, it left the repo rate unchanged at 5.15% against the consensus expectation for a 25 basis points (bps) cut. RBI sharply lowered its GDP forecast for FY20 and also raised the inflation projection for H2FY20 while maintaining the stance of the policy at “accommodative”. The transmission of interest rates is yet to happen. Recently, RBI launched “Operation Twist” to flatten the yield curve and thereby lower interest rates at the shorter end. RBI will keenly watch the upcoming fiscal budget before the next set of rate cuts. Moreover, credit growth by Indian Banks has slowed to 7.1% in 2019 – the second slowest over the last 10 years.

The year 2020 will be a year of evolution. Companies that survive the onslaught of the transition are likely to come out stronger, leaner and better suited to meet the challenges of the new decade. We had suggested to hold on to dry powder for the right opportunity..perhaps 2020 will provide a better investing environment.


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