Thoughts through the cycle: W5 January ’20

Share on facebook
Share on twitter
Share on linkedin

The UK

  • Today, the Bank of England’s Mark Carney presided over his last Monetary Policy Committee (MPC) meeting before Andrew Bailey takes over as Governor. The UK base rate remains unchanged at 0.75%, despite the odds interpolated from the futures market going into the meeting having been 50/50 for a rate cut this week. A month after the general election and on the eve of Brexit, it would seem a good time to take stock of how the UK economy is performing and therefore the context in which the MPC decision is being made.

  • Following the Conservative victory in the general election, there has been a bounce in sentiment in various parts of the UK economy. Data from the property company Rightmove suggests that UK house prices have risen 2.3% since the election, although it is worth noting this is a rise in the ask price not the transaction price. December car registrations rose 3.4% versus a 1.3% decline in November (Bloomberg data). Business optimism is on the rise; the graph below using data from the Confederation of British Industry shows a sharp rebound in manufacturing sector optimism.

Source: Confederation of British Industry, 31 December 2019

  • The UK government’s budget is due in March, and while the Chancellor of the Exchequer, Sajid Javid, is keeping his cards fairly close to his chest with respect to specific details, we believe the direction of policy is going to be clear – the manner of last month’s Conservative electoral victory suggests a strong policy focus on helping the regions and communities which feel ‘left behind’ in the post-industrial era.

  • Headlines such as those suggesting that the House of Lords potentially is moving to York or that the HS2 rail project is continuing despite sharp cost increases, even the rescue of the regional short-haul airline Flybe, all bely this change in focus to government policy which, whether Tory or Labour, has been accused over the past thirty years of working to the benefit of London and the south east to the detriment of the rest of the country. Boris Johnson has for now ruled out another vote on Scottish independence, and it seems that the various parties in Northern Ireland may be inching towards a deal to reopen the Stormont Parliament. At present, major constitutional changes in those parts of the union can be ruled out.

  • With a bounce in house prices, rising business optimism, and the promise of expansionary fiscal policy, why on earth is the Bank of England hinting that there may have to be a rate cut? The MPC is not prevaricating – there is clearly a concern that some of the economic data is still very weak as well as on-going worries that uncertainty over trade deal negotiations could prove to be a further source of disruption.

  • December’s UK manufacturing PMI data, although bouncing slightly, is still below 50 as the graph below reveals. The huge amount of global central bank easing in the second half of 2019 has led to a bounce in PMIs, but it is as yet unclear if this bounce will turn into a more sustainable rebound. Readings below 50 are contractionary for the economy.

Source: Bloomberg 27 January 2020

  • December’s CPI inflation reading also fell below estimates (1.3% actual vs 1.5% estimate, as per the graph below), and this may be where the real problem lies. Global markets rose in Q4 as Sino-US trade tensions dissipated and as central banks eased policy rates. While inflation expectations rose as a result, there is some evidence that they continue to remain subdued, or at least well below central bank targets (the Bank of England has a mandate to pursue price stability but this in practice means aiming at a 2% inflation target).

Source: Bloomberg 27 January 2020

  • When inflation expectations fall, central banks tend to cut rates to stimulate the economy. One of the by-products of this policy is that it tends to cheapen credit, allowing corporate (and government) debt balances to increase, adding to the aggregate cost of debt, reducing growth and inflation expectations, and thus forcing central banks to cut rates further in what appears to be a downward spiral.

  • The build-up of debt in the economy is starting to cause financial distress, even though this has yet to feed through to employment. In an article in the Financial Times, data from insolvency firm Begbies Traynor shows some 500,000 UK businesses now face distress in terms of falling credit scores or impending county court judgements for non-payment of debts (“Nearly 500,000 UK businesses face ‘significant’ distress”, Financial Times 27/01/2020).

  • The Q4 global reflation bounce has given way once again to falling rates and the spectre of debt-deflation. Having peaked at 0.87% on the day after the election, 10yr gilt yields have fallen to 0.52%, in part due to growing speculation that the MPC will cut rates. Falling rates have had a negative effect on the UK banks. Royal Bank of Scotland (RBS.LN) has seen its share price fall nearly 17% from its post- election day high of 265p (graph below). Strong banks are usually the sign of a strong and growing economy.

Source: Bloomberg 27 January 2020

  • The pound has been understandably unstable given the backdrop of rate uncertainty. Chancellor Javid has indicated that the UK will not necessarily be seeking close alignment with the EU in trade talks. The Brexit bill has been amended to ensure an outcome (as yet undecided) by December 2020, raising the prospect of a new cliff-edge. All of this adds to uncertainty. While US treasury secretary Mnuchin has spoken of a US-UK trade deal in 2020, issues over the use of Huawei technology in the UK’s 5G network may yet cause a diplomatic rift. Cable has fallen from its post-election high of $1.35 and is just about hanging on at the $1.30 level (graph below).

Source: Bloomberg 27 January 2020

  • Since the day after the general election, the pound has fallen, gilts have rallied, and banks stocks have fallen sharply. The Bank of England may or may not cut rates depending on the direction of the world economy in general and of EU trade negotiations in particular. The UK is about to embark on what is hopefully a new, exciting, and successful journey outside the European Union. Markets are however suggesting the first few steps may yet prove to be difficult, or at least uncertain.

Unless otherwise stated, all opinions within this document are those of the RWC Diversified Return Investment Team, as at 27 January 2020.

The term “RWC” may include any one or more RWC branded entities including RWC Partners Limited and RWC Asset Management LLP, each of which is authorised and regulated by the UK Financial Conduct Authority and, in the case of RWC Asset Management LLP, the US Securities and Exchange Commission; RWC Asset Advisors (US) LLC, which is registered with the US Securities and Exchange Commission; and RWC Singapore (Pte) Limited, which is licensed as a Licensed Fund Management Company by the Monetary Authority of Singapore.

RWC may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. RWC seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.

This document is directed only at professional, institutional, wholesale or qualified investors. The services provided by RWC are available only to such persons. It is not intended for distribution to and should not be relied on by any person who would qualify as a retail or individual investor in any jurisdiction or for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation.

This document has been prepared for general information purposes only and has not been delivered for registration in any jurisdiction nor has its content been reviewed or approved by any regulatory authority in any jurisdiction. The information contained herein does not constitute: (i) a binding legal agreement; (ii) legal, regulatory, tax, accounting or other advice; (iii) an offer, recommendation or solicitation to buy or sell shares in any fund, security, commodity, financial instrument or derivative linked to, or otherwise included in a portfolio managed or advised by RWC; or (iv) an offer to enter into any other transaction whatsoever (each a “Transaction”). No representations and/or warranties are made that the information contained herein is either up to date and/or accurate and is not intended to be used or relied upon by any counterparty, investor or any other third party.

RWC uses information from third party vendors, such as statistical and other data, that it believes to be reliable. However, the accuracy of this data, which may be used to calculate results or otherwise compile data that finds its way over time into RWC research data stored on its systems, is not guaranteed. If such information is not accurate, some of the conclusions reached or statements made may be adversely affected. RWC bears no responsibility for your investment research and/or investment decisions and you should consult your own lawyer, accountant, tax adviser or other professional adviser before entering into any Transaction. Any opinion expressed herein, which may be subjective in nature, may not be shared by all directors, officers, employees, or representatives of RWC and may be subject to change without notice. RWC is not liable for any decisions made or actions or inactions taken by you or others based on the contents of this document and neither RWC nor any of its directors, officers, employees, or representatives (including affiliates) accepts any liability whatsoever for any errors and/or omissions or for any direct, indirect, special, incidental, or consequential loss, damages, or expenses of any kind howsoever arising from the use of, or reliance on, any information contained herein.

Information contained in this document should not be viewed as indicative of future results. Past performance of any Transaction is not indicative of future results. The value of investments can go down as well as up. Certain assumptions and forward looking statements may have been made either for modelling purposes, to simplify the presentation and/or calculation of any projections or estimates contained herein and RWC does not represent that that any such assumptions or statements will reflect actual future events or that all assumptions have been considered or stated. Forward-looking statements are inherently uncertain, and changing factors such as those affecting the markets generally, or those affecting particular industries or issuers, may cause results to differ from those discussed. Accordingly, there can be no assurance that estimated returns or projections will be realised or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this document may be aggregated data of Transactions executed by RWC that has been compiled so as not to identify the underlying Transactions of any particular customer.

The information transmitted is intended only for the person or entity to which it has been given and may contain confidential and/or privileged material. In accepting receipt of the information transmitted you agree that you and/or your affiliates, partners, directors, officers and employees, as applicable, will keep all information strictly confidential. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information is prohibited. The information contained herein is confidential and is intended for the exclusive use of the intended recipient(s) to which this document has been provided. Any distribution or reproduction of this document is not authorised and is prohibited without the express written consent of RWC or any of its affiliates.

Changes in rates of exchange may cause the value of such investments to fluctuate. An investor may not be able to get back the amount invested and the loss on realisation may be very high and could result in a substantial or complete loss of the investment. In addition, an investor who realises their investment in a RWC-managed fund after a short period may not realise the amount originally invested as a result of charges made on the issue and/or redemption of such investment. The value of such interests for the purposes of purchases may differ from their value for the purpose of redemptions. No representations or warranties of any kind are intended or should be inferred with respect to the economic return from, or the tax consequences of, an investment in a RWC-managed fund. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. Nothing in this document constitutes advice on the merits of buying or selling a particular investment. This document expresses no views as to the suitability or appropriateness of the fund or any other investments described herein to the individual circumstances of any recipient.

AIFMD and Distribution in the European Economic Area (“EEA”)

The Alternative Fund Managers Directive (Directive 2011/61/EU) (“AIFMD”) is a regulatory regime which came into full effect in the EEA on 22 July 2014. RWC Asset Management LLP is an Alternative Investment Fund Manager (an “AIFM”) to certain funds managed by it (each an “AIF”). The AIFM is required to make available to investors certain prescribed information prior to their investment in an AIF. The majority of the prescribed information is contained in the latest Offering Document of the AIF. The remainder of the prescribed information is contained in the relevant AIF’s annual report and accounts. All of the information is provided in accordance with the AIFMD.

In relation to each member state of the EEA (each a “Member State”), this document may only be distributed and shares in a RWC fund (“Shares”) may only be offered and placed to the extent that (a) the relevant RWC fund is permitted to be marketed to professional investors in accordance with the AIFMD (as implemented into the local law/regulation of the relevant Member State); or (b) this document may otherwise be lawfully distributed and the Shares may lawfully offered or placed in that Member State (including at the initiative of the investor).

Information Required for Distribution of Foreign Collective Investment Schemes to Qualified Investors in Switzerland

The representative and paying agent of the RWC-managed funds in Switzerland (the “Representative in Switzerland”) is Société Générale, Paris, Zurich Branch, Talacker 50,

P.O. Box 5070, CH-8021 Zurich. In respect of the units of the RWC-managed funds distributed in Switzerland, the place of performance and jurisdiction is at the registered office of the Representative in Switzerland.

Explore more


Please confirm your investor type



By clicking Submit, you agree that you have read and accepted the terms and conditions detailed in the DISCLAIMER

This website uses cookies. A cookie is a small data file placed on your computer which captures information about your choices which allows us to improve your experience of the website, for example, by remembering your country of residence. By continuing to access this website, you agree to be bound by our Cookie Policy. You can accept and/or block at any time by changing your browser settings.


Where are you located?


Rest of world

By clicking Submit, you agree that you have read and accepted the terms and conditions detailed in the DISCLAIMER


What type of investor are you?



By clicking Submit, you agree that you have read and accepted the terms and conditions detailed in the DISCLAIMER