Introduction

Equity markets enjoyed a strong finish to the year. Positive stock performance was broad-based. All sectors and regions benefited.

Valuation multiple expansion was responsible for most of the market appreciation in the last year. Equity markets also benefited from central banks’ pivot towards lower interest rates. Weak or decelerating growth in virtually every major economy, coupled with overhangs from international trade frictions, have compelled the major central banks to retain stimulative policies for the foreseeable future.

Lately, the biggest tailwind has been a de-escalation of trade tensions between the U.S. and China. While they have agreed to a phase one trade agreement, future stages of negotiation between the two countries should be significantly more challenging as structural reforms to China’s policies need to be addressed.

We remain cautious as economic fundamentals are still weak and market performance has been overly reliant on monetary accommodation.

Market Update

Among the most important developments in the fourth quarter, the U.S. and China agreed to a phase one trade agreement. Such a deal had been anticipated for months, and once it is signed, expected to be in early January, it should significantly de-escalate the U.S.-China trade war. The development led both sides to cancel new tariffs set to be implemented in mid-December; and, in addition, the U.S. reduced the tariff on a prior batch of Chinese imports worth $120 billion from 15% to 7.5%. Still, the U.S. has kept a 25% tariff on an original batch of Chinese imports worth $250 billion. It is thought that, as part of the agreement, China will commit to substantial purchases of U.S. goods, especially agriculture products, in the coming years. China will also strengthen intellectual property protections and increase access to the financial services markets. Purportedly, the trade agreement will also establish a strong dispute resolution system to aid with compliance. Exact details are scant because the text of the agreement still needed to be translated, proofread, and legally scrubbed prior to signing.