By Andrew Quin

February 18, 2020 | TWD Invest

January 2020 in Review

Economic Developments


  • The Reserve Bank of Australia (RBA), held the Cash rate at a record low of 0.75% on 4 February, while facing a Chinese economic slowdown in part due to Coronavirus concerns, and Australian bush fires potentially slowing business. China’s share of Australian exports was 33% in 2018-19, against 7% in 2002-03. Australian inflation remains at 1.80%, below the 2-3% RBA target.
  • In its February Statement on Monetary Policy, the RBA said the economy would grow by 2.0% for the year to December 2019, and 2.0% for the year to June 2020 – down from 2.25% and 2.5% respectively, as advised in November.
  • The next RBA meeting is 3 March 2020.
  • Australian house prices in January lifted in all capital cities. Sydney and Melbourne continue to lead increases, prices grew 1.1% and 1.2% over the month, each city approaching their respective 2017 peaks.
  • Australian GDP Growth is seen below.


  • Australia’s unemployment rate fell in December from 5.3%, to 5.1% on the creation of 28,800 new jobs.
  • The Australian dollar has traded down from 0.6900 to the US dollar to 0.67 over the past month.
  • Interestingly both China and India appear to be experiencing some stagflation (see chart below). Where both slowing growth and rising inflation is experienced together. As well as trade issues this could be influenced by currency movements. Outside emerging markets we continue to suggest potential for rising deflationary risks.


  • Inflation trending down (deflationary) in recent years in advanced economies is shown below.


The UK formally left the EU on 31 January 2020. While the UK has agreed the terms of its EU departure, both sides still need to decide what their future relationship will look like. While much has been written on Brexit, we feel there are bigger issues for the markets and do not feel the situation will be overly negative for the UK in the long term.


The World Health Organisation (WHO) has decided the outbreak is a “Public Health Emergency of International Concern” (PHEIC). The US has declared the coronavirus a public health emergency in the US, and announced that people who pose a risk of transmitting the disease will temporarily be suspended from entering the US. Over 28,000 people have now contracted the disease mostly in China. While the death rate is reported only 2.1% mainly in the older population, the concerning thing about this virus is that it is reportedly spreadable while asymptomatic for approximately 15 days (this is yet to be clarified). This potentially sets up the virus to spread rapidly with consequent impacts on business and the stock market, particularly if it reaches other developing countries.

Economists have estimated that China’s coronavirus outbreak has cost more than US$144 billion in losses to the restaurant, tourism and movie industries in the seven days of the Lunar New Year holiday. Hyundai has stopped production in Korea due to a lack of parts, Cathay Pacific has cut global capacity approximately 30%. Ireland and the UK has had some success treating the virus with HIV medicines and many other countries, including Australia, are working on a vaccine. The People’s Bank of China recently advised that the virus could dent growth in the next two quarters by an average 0.3% points. The death toll at the time of writing is 813, above the SARS death toll.

While there has been some pull back in markets due to the virus, expectations the virus could cause central banks to reduce interest rates further and governments increase stimulatory policy is in part market supportive.


Economist do not commonly venture into this area due to political correctness. However the declining fertility rate outside Africa is a primary reason for slow economic growth, despite huge global deficit spending and low interest rates. Comprehensive research conducted in the 1930s found no case in history of below replacement birth rates having been turned around, with consequent negative effects on economic and socioeconomic systems. This is a particular concern for countries such as Poland (1.32 births per woman) and Japan (1.4 births per woman) Sustainable replacement rates for most countries are considered to be 2.1 births per woman. Below a certain point recovering replacement level birth rates can become unattainable. Investors should consider the impact of demographics in certain countries.

Global Debt

Global debt is US$252.6 trillion – an all-time high or 322% of global GDP.
The world is addicted to debt, cut down on debt, economic growth slows and existing debt cannot be serviced. Keep pushing debt higher and the fiat system will eventually implode due to an eventual economic slowdown (deflation) or a black swan event, such as a forced lift in bond yields or interest rates due to a lift in inflation. This is a primary risk for investors, however Japan has demonstrated that extreme monetary policy can exist for an extended period.

OTC Market

The Over the Counter (OTC) Derivatives market has grown to US$640 trillion June 2019) notional up from US$544 trillion notional at the end of 2018. In the event of default value at risk moves closer to notional value, as was seen in 2008. The OTC market remains a primary risk factor for the world economy.

Reliance on Capital Raising

There are approximately 191 companies in the US S&P 500 that have net tangible book values below zero, up from 124 five years ago. If a prolonged period of difficulty raising capital was to occur, these companies could find it difficult to survive.

Repo Market

The US Federal Reserve has been buying assets in the Repurchase market recently. It will not advise which bank it is buying assets from for a period of two years. This is a sign that a financial organisation is experiencing financial stress. Repos are a system that can be used to maintain reserve levels in the overnight money market.


The convergence of multiple technologies in the next 30 years culminating with potential general Artificial Intelligence estimated to arrive in 2050 will dramatically change the structure of the global economy.

The rapid recent increase in Tesla’s stock price is a good example of how technological change can dramatically change existing industry competitive positions, something that will be a primary characteristic of the investment landscape of the future.

US Presidential Election

The current odds of President Trump winning re-election is 57%. Should Trump not be re-elected, the US stock market would be expected to decline, currently we expect President Trump to win a second term.

Commodity Prices

  • We continue to believe the market is underestimating the rate of adoption of electric cars which could weigh on the crude oil industry heading into 2023. The UK plans to ban the sale of diesel and gasoline cars by 2035. The pressures on the coal industry is already apparent. Germany plans to phase out coal power plants by 2038, the UK by 2024.
  • The US EIA predicts that US electricity generation from renewables is expected to surpass that of nuclear and coal by 2021. And natural gas by 2045.
  • In the last 30 days, there has been a general weakness in prices for Copper, Lead, Aluminium, Nickel and Copper.
  • The gold price is US$ 1573/oz. up about US$25 over the past month, following rising concerns re fiat currency. The Gold price is shown below.

  • WTI Crude oil is currently quoted at US$50.49/bbl., down from US$59.50/bbl. in the prior month due to economic concerns related to the Coronavirus. We continue to see conventional energy investment as at risk, as alternatives gain in both environmental support and price competitiveness. Forecasts indicate a fall in crude oil demand starting in 2023, by 2030 global crude oil demand is forecast to have fallen 30% compared to 2019. To put this fall into perspective, this is larger than current production in North America, Europe and Russia.

Bond Markets:

  • The Australian 10-year bond yield is 1.029% moving from 1.24% at the start of the prior month.
  • The 2-year yield is 0.76% and the 5-year yield is also quoted at 0.76%.
  • There are alternating views on inflation with some participants warning of the potential for a surprise increase particularly in the US with their strengthening economy.
  • Others think the global bond markets are setting up for a prolonged deflationary period, which could be driven by technology pushing costs down and reducing credit expansion.


  • The US Federal Reserve’s efforts to reduce its balance sheet is now being reversed, mainly through the Repo market (see chart below).

  • The US 10-year bond yield is 1.54% down from 1.83% in the prior month. We do not anticipate a US recession in the near term, though in the longer term risks are increasing due to factors such as Coronavirus, with some economists estimating a 70% recession risk for the US in 2021.
  • The Federal Open Market Committee next meets 17-18 March. The market anticipates up to three interest rate cuts in 2020. The current Federal Funds rate is 1.50% to 1.75%.
  • US Nonfarm payrolls lifted 225,000 in January, well above Consensus of 158,000. The unemployment rate ticked higher to 3.6%, as the labour force participation rate increased 0.2% to 63.4%, matching its highest level since June 2013.
  • The US Presidential Election is taking place on 3 November 2020, we expect US President Trump to win a second term. If President Trump was to lose the election, this would likely be a negative for the US stock market.
  • S&P 500 earnings in the Fourth quarter are expected to have risen 0.7% from the year-ago quarter.
  • The S&P 500 PE ratio is currently 24.45 above the historic average of 15.78.
  • According to the World Bank Advanced economies are expected to slow as a group to 1.4% from 1.6% growth, mainly reflecting lingering weakness in manufacturing. Emerging market and developing economies are forecast to see growth accelerate to 4.1% from 3.5% last year.
  • The German 10-year bond yield is -0.447% from -0.20% at the start of last month.
  • China’s battle to contain the spread of the coronavirus may disrupt its political and diplomatic agenda, including implementation of its interim trade deal with the US. China has moved to cut tariffs on US$75 billion of US imports, by approximately 50%.
  • Officially, China is targeting 6% GDP growth for 2020. However, China may ultimately lower its GDP estimates, after China’s economy grew just 6.1% in 2019—its lowest rate in almost three decades. China and Indian GDP Growth is shown below.

Market Movements

Australian Equities:

  • The ASX200 Index lifted 4.96% over the last 25 trading days. The ASX200 chart is shown below.

Source: Metastock



Global Equities:

  • The broad global equities index (MSCI ACWI) delivered a 19.29% return over the past year. The US S&P500 lifted approx. 2.8% in the past month, and is up 22.97% over the past 12 months, the STOXX Europe 600 Index was up 1.25% over the past month, and was up 18.51% over the last 12 months. The Shanghai stock index was down approx. -7.0% over the past month and was up 9.84% over the last 12 months.

Looking Ahead

  • This is the most complex macroeconomic environment since 2008. There are multiple risk factors that could spiral out of control. To date central banks have managed to hold these factors together. However, there is no guarantee that these factors will remain contained in future. Low risk and diversified exposures are suggested in the current environment and given the complexity of the macroeconomic outlook.
  • While there is potential for a near term correction in the stock market, especially if President Trump was to lose the next election. It is at least possible that if pressures rise in the fiat currency system and/or bond markets, investors may push global stock markets yet higher.
  • While global debt remains a significant risk, we believe technological disruption over the next 10-30 years will be a major influencing factor for investors.
  • We suggest maintaining a diversified asset mix, including gold as insurance maintaining a low or no debt position. Gold may move lower in the near term.
  • The world economy is dependent on debt accumulation to maintain growth, slow the rate of debt growth and the economy slows making it more difficult to service debt. However, constant increases in debt will ultimately put the fiat currency system at risk. Importantly Japan has demonstrated that this can take a very long time to occur. Basically the current extreme monetary policy works to an extent, but it is ultimately unsustainable. Technology changes may ultimately act to transform the global economy.
  • We see a probability that stock markets could move lower in the short term, however remain positive on gold production companies, the large end of the mining sector ex-coal and other energy, infrastructure and specific technology companies. A pull back could present an opportunity to reposition into these sectors.
  • The bottom line is that there are currently multiple unsustainable economic and socioeconomic factors, therefore the primary question is, can technology change move fast and positively enough to negate these unsustainable factors? This is unknown, however investors could partially hedge this risk by holding a diversified range of assets including gold as insurance, should the fiat currency system become unstable, and reducing debt to easily sustainable levels.

Words by Andrew Quin.