Cambridge Weekly Update – 3rd February 2020

Headwinds and tailwinds

The events of the past few weeks have left some investors wondering whether we are witnessing a rapid
deterioration of the erstwhile ‘fair to potentially better than expected’ 2020 outlook. In light of the Chinese
Corona virus threat to all kinds of human activity, equity markets are at levels that could be pricing-in more
positive developments than is now realistic to expect. On top of this, central banks appear to once again
be moving to a less generous stance in supporting markets with additional liquidity. Brexit has also reappeared on the business radar with a reminder that planning uncertainty may have reduced but has not
disappeared.

Bank of England in a bind

Central bank meetings are rarely riveting affairs. In the age of round-the-clock media coverage, central
bankers are now just as dedicated to managing expectations as they are to monetary policy. Usually when
interest rate decisions are made, ‘forward guidance’ has already signalled the intentions of policymakers,
making the announcement itself feel like old news. So, the fact that Thursday’s decision by the Bank of
England (BoE) to keep interest rates on hold left some in our office genuinely surprised says a lot.

Corporate earnings turning

As we have written in recent weeks, capital markets are in a delicate balance. On the one hand, hopes of
a recovery in global growth keep pushing equity prices higher – helped by supportive central bankers the
world over. On the other, the fact that the underlying real economy is (for now) struggling to live up to
investors’ lofty expectations has left valuations stretched. Equities are therefore vulnerable to the changing
winds. The Corona virus scare currently gripping the world is exactly the sort of shock that could cause a
sudden reversal – unless markets find other reasons to support the rally. In short, investors need something
to get excited about.

Read the full commentary here