OCM Commentaries

Market Commentary 16th January 2020

By January 16, 2020 January 23rd, 2020 No Comments

Trade Optimism Lifts Global Equity Markets

With the long-awaited phase one US-China trade deal now agreed and signed, markets benefitted from a boost in the growth outlook this week, with investors hoping that the deal will mark the start of a new relationship between the US and China. After the deal was signed yesterday, economists quickly turned to focus on the next stage of talks. President Trump has promised further negotiations to tackle the more long-standing issues, while choosing to retain tariffs on $360 billion in Chinese imports to use as leverage during the next stage in discussions.

Although trade risks have reduced in recent weeks, it is clear that they will remain throughout 2020, and could potentially re-escalate in the future. For now, however, both sides appear focused on cooling the tensions which weighed heavily on the global economy last year. It is clear that the next stage of negotiations is unlikely to be easy or come to fruition anytime soon, therefore risks are likely to remain for the majority of the year, with key risks being weighted towards the second half of the year in our view.

A Boost To The Outlook

The signing of the phase one deal is set to reinforce the stabilising momentum of the Chinese economy, with economic data released tomorrow expected to indicate some success in braking the slowdown towards the end of last year. Looking ahead, this week’s trade deal may help the Chinese economy, both by increasing exports and raising domestic confidence and investment. The same can be said for the global economy, with reduction in trade risk providing a much-needed boost to economic sentiment.

Tariffs To Remain In Place

During phase one negotiations, US officials insist that tariffs helped to deliver meaningful commitments on intellectual property, currency and the opening up of its financial services sector, as well as promises of a $200billion Chinese spending spree. If adhered to, this will increase exports to China to a record of more than $250 billion this year and more than $300 billion in 2021. The same strategy with the use of tariffs as a bargaining chip is expected to be applied in phase two negotiations, indicating further volatility and brinkmanship could lie ahead in US-China trade relations.

While President Trump suggests that this has been a winning strategy, the reality is that despite being three years in the making, the phase one deal contains little new developments on key issues, and many trade experts observe that China has so far shrugged off tariff pressure and is unlikely to bend to more, even if Trump is re-elected later this year. The fact that Trump had to split his pursuit of a comprehensive deal into segments is a testament to that.

What this means is that American businesses are likely to face another year or more of tariffs and supply chain turmoil. Given that the President will be ramping up to the US Election in November this year, it is unlikely that he will choose to re-escalate tensions in the near to medium term, and this interim deal will likely provide a favourable backdrop to his re-election campaign. The signing of the trade deal provided a modest boost to the US outlook.

Phase Two Negotiations

After the phase one agreement was signed, the focus quickly turned to phase two negotiations, and what might be included in a potential phase two deal. Having gained momentum from the phase one agreement, the US side appears keen to re-start negotiations soon, however details on when negotiations will start are yet to be agreed.

In terms of what a phase two deal may contain, the Chinese have rejected most of the elements that would be in a phase two deal in the face of significant and sustained tariff pressure, and the Chinese are not about to change their economic model to appease the US. For this reason, expectations are that phase two negotiations will be a long and drawn out process, leading our expectations that trade risks will remain in the background over the first half of the year. Robert Lighthizer, Trump’s top negotiator with the Chinese told reporters that even if negotiations for a phase two didn’t succeed, the remaining tariffs would go some way to resolving the issues with industrial subsidies, indicating that negotiators have low hopes of a quick resolution.

Looking Ahead

With trade tensions now cooling, investors are beginning to turn to the economic data for signs of recovery in the global economy. In the US, Q4 earnings season is gaining momentum, with trade uncertainty feeding through into lower earnings expectations, suggesting that the earnings recession continued into the fourth quarter of the year. It is clear that it will be a long road ahead for negotiations before a substantive second phase can be agreed, and tariffs are likely to weigh on exposed companies throughout 2020.

In the UK, following the election in December, economists are focusing on new data releases to ascertain the underlying health of the UK economy as Brexit uncertainty erodes (somewhat). Key GDP and inflation data influenced UK markets and the pound this week, with releases remaining broadly in line with our expectations.

For further information on the UK economic data influencing markets this week, and what this may mean for UK interest rates, please see the attached Market Update document.

As we move further into the year, with growth drivers remaining positive while central bank policy remains supportive, we are cautiously optimistic on the direction of markets over the year, and continue to look for opportunities as they arise.


Key Events We Are Watching This Week:

  • Friday: Chinese GDP Q4 Growth, Industrial Production
  • Tuesday: UK Unemployment Rate for November, German Economic Sentiment.

For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.

Model Portfolios & Indices

Global equity markets remained mixed over the week, with trade optimism being partially offset by risk-off sentiment owing to an escalation in US-Iran tensions.  The OBI portfolios remain defensively positioned in comparison to normal market conditions, and we continue to closely monitor the data, looking for opportunities as they arise. The portfolios gained over the week owing to strong performance of our small/mid cap assets earlier in the week prior to the increase in US-Iran tensions, with changes made in recent weeks expected to continue to provide further support to portfolio performance going forward.

Please note that the YTD data in the table below reflects performance from the start of the new year.


Important Information


The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.


Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.


This Day in History


On this day in 1920, the first assembly of the League of Nations was held in Paris. The League was the first worldwide intergovernmental organisation whose principal mission was to maintain world peace. US President Woodrow Wilson went on to win the Nobel Peace Prize for his role as the leading architect of the League.

Have a great week,


Jason & Gina