OCM Commentaries

Market Commentary 20th February 2020

By February 20, 2020 February 21st, 2020 No Comments

UK Economy Shows Signs of Improvement


The outlook for the UK economy has significantly improved in recent weeks, with data and sentiment surveys showing evidence of a post-election pickup in activity, which is being called the ‘Boris bounce’.  Activity in both the manufacturing and services sectors picked up in January, which was reinforced by a surge in business sentiment, with the number of firms planning to invest to boost capacity rising to a record high, all thanks to the Conservative government’s business-friendly policies.


More recently, January’s retail sales figures showed that December’s election result gave consumers the confidence to reopen their wallets.  Sales rose 1.6% from December, the largest jumped in almost two years, ending the worst run for British stores on record and adding to signs of an economic rebound after the December election.  The recent flooding and effects of the coronavirus may hinder sales in February, however it seems as though the economy has turned a corner at the start of the year.


Fiscal Stance


The UK’s economic policy was thrown into disarray last week after Sajid Javid dramatically quit as Chancellor of the Exchequer following a row with Prime Minister Boris Johnson.  Javid resigned after the prime minister demanded he fire all five of his most senior aides and set up a new joint economic unit with Johnson’s office.  Though Johnson’s office moved swiftly to appoint Javid’s deputy, Rishi Sunak, as the new chancellor, the sudden shift in personnel risks throwing Britain’s preparations for life outside the European Union into chaos, as Johnson’s office could not confirm that the budget on March 11thwill go ahead as planned.


There are two big conclusions to draw from Sajid Javid’s departure. The first — reinforced by the overall cabinet reshuffle — is that the centre of power in the British government is Boris Johnson and his own chief adviser and strategist Dominic Cummings.  The Second conclusion is that Britain’s fiscal stance is about to become a lot looser. Although Javid had already gone a long way to accommodating Johnson’s big-spending plans; rewriting Britain’s fiscal rules to allow the government to take advantage of low interest rates and to increase borrowing for investment, the fiscally conservative chancellor wasn’t happy to sign off on an all-around spending spree. Cabinet ministers were told to axe at least 5% of their budgets, targeting any program that doesn’t impact health, crime-fighting or regional inequalities. In recent weeks, there were reports of tension between the chancellor’s office and Cummings over spending. However, Javid’s replacement, Rishi Sunak, will have less control over his advisory team. He may also have a harder time standing up to No. 10 than Javid and is expected to announce a significant increase in spending in next month’s budget in an attempt to boost the economy as Britain embarks on life outside the European Union.


As it stands, we are well-positioned well to benefit from the Boris bounce via our exposure to UK small and mid-cap companies, the sectors we expect to be the main beneficiaries from an increase in domestic spending.


Tariff Tightrope


Much uncertainty still remains around the UK’s departure from the European Union, particularly with tariffs on imported and exported goods.  The UK will continue to apply existing tariffs on goods that equate to an average import tariff of just under 1%, until the transition period ends on 31st December 2020.  But once the transition period ends, the government will have to decide what tariffs to apply to UK imports.  If a zero-tariff goods deal is agreed with the EU before the 31st December, as the government would hope, then the average tariff would fall to just under 1%, resulting in a negligible impact on UK GDP. However, should the UK fail to secure a trade deal with EU before the end of the year the average tariff could rise to around 2.5%.  That’s because the all EU and non-EU trade would be subject to the UK’s Global Tariffs.  In this scenario the rise in import prices would likely contribute to inflation and cut GDP.


Overall, if the UK agrees a zero-tariff goods deal with the EU, then the new regime is likely to result in marginally lower import tariffs, but with very few implications on GDP.  It is only if the UK fails to agree a trade deal that the new regime will act as a drag on growth.



Key Events We Are Watching This Week:


As always, we are watching markets and new economic data releases closely, however we continue to pay particular attention to the situation with the coronavirus outbreak in China, and any data on the economic impact of the outbreak.

We have explored the recent developments on this further in the attached Market Update document.


  • Friday: Eurozone PMI data
  • Tuesday: Japan Leading Economic Index

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 continued to experience high levels of volatility over the week on new developments in the coronavirus outbreak. Key indices experienced mixed performance over the week on speculation over what impact the outbreak will have on company earnings and economic growth in the first quarter, while suggestions that the virus is being contained as the number of daily new cases declines offset fears of more pronounced economic disruption. After last week’s repositioning of the portfolios, we have now returned to normal equity content, however have chosen our exposure carefully while we wait for conditions to improve further. The portfolios gained over the week owing to our selective approach to specific areas of equity markets, with the portfolios benefitting from a high level of diversification given uncertainty over the virus outbreak.

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 1547, aged 9 years old, Edward VI was crowned at Westminster Abbey. Edward, the son of Henry VIII and Jane Seymour, was the third monarch of the Tudor dynasty and England’s first monarch who was raised as a Protestant.


Have a great week,


Jason & Gina